(Bloomberg) -- Indian bonds suffered their biggest drop in more than a year on concerns about a large government borrowing amid a nationwide lockdown that’s diminished trading activity in the country’s financial markets.
The benchmark 10-year yield surged 17 basis points to 6.31% on Friday, its biggest jump since January 2019, with traders getting their first chance to react to the fundraising due to the holidays on Wednesday and Thursday. The rupee declined 0.8% to 76.1725 per dollar.
A knock-on effect of the emergency restrictions on India’s financial markets has been the drying up of volumes and a spike in volatility. That prompted the Reserve Bank of India Friday to cut trading hours in bonds and the currency markets, a move that comes just as the government prepares to start its record 7.8 trillion rupee borrowing plan next week.
“The market is jittery about the fact that it faces a very heavy weekly bond sales calendar,” said Debendra Dash, a Mumbai-based fixed-income trader at AU Small Finance Bank. “Markets will demand higher yields at every auction unless the central bank doesn’t come up with its open-market purchases.”
The government said Tuesday it will sell 4.88 trillion rupees ($64.5 billion) of bonds in the six months to September. That, along with treasury bill sales, translate to a weekly supply of at least 450 billion rupees, versus 370 billion rupees in the year-ago period. There is concern that the auctions may not lure enough amid poor volumes and truncated hours.
Trading will be held from 10 a.m. to 2 p.m. Mumbai time starting April 7 through April 17, the RBI said in a statement. Currently, these markets work from 9 a.m. to 5 p.m.
While the new timing underlines the hardships faced by traders “the problem is how will the auctions be conducted in such curtailed trading hours,” said Naveen Singh, head of fixed-income trading at ICICI Securities Primary Dealership.
The central bank has injected 400 billion rupees via its open market purchases calm yields. It has also cut rates and offered to add about $50 billion through its various liquidity infusion programs. Earlier this week, it allowed foreigners greater access to sovereign bonds as the government begins its record 7.8 trillion rupees of debt sales.
All to little avail. Global funds have sold a net $9.4 billion of rupee bonds this year, the highest in Asia.
Heavy debt issuance has prompted calls for the central bank to intervene by expanding its open-market purchases.
“The RBI has to support the primary and secondary market,” Chakravarthy Rangarajan, a former central bank governor told BloombergQuint Wednesday. “Monetization of debt is inevitable. A large borrowing in a short time cannot be managed without monetizing.”
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