For 32 Minutes, Everything Was Quiet in India’s Bond Market

(Bloomberg) -- The first signs that India’s $790 billion sovereign bond market is cracking under the strain of the coronavirus pandemic showed up on Tuesday.

For half an hour after trading started, nobody bought or sold a bond on the Reserve Bank of India’s platform. Volumes were just 72.1 billion rupees ($930 million) as of 5 pm close in Mumbai, compared with the year’s daily average of 450 billion rupees.

The collapse in trading mirrors the empty streets of Mumbai after the government locked down the nation’s financial hub in a desperate attempt to contain the virus. Even before the emergency measure, a freeze in credit markets have been sapping confidence and prompting ever stringent calls from investors for the Reserve Bank of India to do more.

“I felt a sense of a big vacuum today when I saw my screen was completely blank, phones are not ringing and the office being mostly empty,” said Harish Agarwal, a trader with FirstRand Bank Ltd. in Mumbai, with 15 years of experience. “I haven’t seen such a situation in my whole career.”

Adding to the market stress, the state of Maharashtra, where Mumbai is located, has one of the highest numbers of virus infections. Traders working from home aren’t allowed to take positions, which hurts volumes. Bid-ask spreads in bonds were as wide as 50 paise in early trading, traders said.

“It seems bid and ask spreads are practicing social distancing,” said Arvind Chari, head of fixed income and alternatives at Quantum Advisors in Mumbai. “The market is viewing RBI’s actions as piecemeal as compared to the large steps taken by global central banks.”

The risks of a credit freeze or market freeze are growing, he said.

Like the rest of the world, companies and banks are hoarding cash with daily life coming to a halt. The turmoil comes at a bad time for Indian companies facing a record 1.73 trillion rupees in bonds due next quarter.

The RBI has done two forex swaps providing about $2.7 billion of dollar liquidity and announced bond purchases through open market operations. On Tuesday, it brought ahead a 250-billion-rupee cash injection plan to March 26 from March 30 while allowing standalone bond underwriters more temporary access to the central bank’s liquidity tap.

“The RBI is struggling to reorient its reaction function to the current crisis-like situation that has engulfed the world, including India,” said Suyash Choudhary, head of fixed income at IDFC Asset Management. “The response has to measure in speed and quantum to the size of the problem and has been decidedly underwhelming so far.”

Curfews and Lockdowns

Recent measures have done little to tame surging bond yields.

The benchmark 10-year yield has risen 30 basis points since falling to 5.99% in early March, which was the lowest in a decade. Sales of corporate bonds have dwindled. A top-rated state-run lender failed to sell a bond this week in a sign of financing difficulties faced by the nation’s firms.

Trading volumes have been dropping steadily through the past two weeks, going from a high of 1.35 trillion rupees to 116.4 billion rupees on Monday.

Volumes tumbled as lock downs in the financial capital forced traders to stay away from their offices. Treasuries at some state-run banks were running at 50% of the capacity, with some traders saying they can’t take positions while working from homes.

READ: World’s Biggest Lockdown Prompts Tycoons to Seek India Rate Cuts

To overcome the crisis, the Association of National Exchanges Members of India, a representative body of brokers, has asked the Indian government to include broking and depository services as “essential” and exempt them from the current lockdown, its president Vijay Bhushan said in a tweet.

“These are unprecedented times, with lock-downs and curfews,” said Anoop Verma, vice president for treasury at DCB Bank Ltd. “That has hit trading in a big way. The idea is now to do the bare minimum.”

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