India Bonds Drop by Most Since 2017 on Modi’s New Borrowing
The portrait of Mahatma Gandhi is displayed on an Indian 2,000 rupee, top, and 500 rupee banknotes in an arranged photograph. (Photographer: Brent Lewin/Bloomberg)

India Bonds Drop by Most Since 2017 on Modi’s New Borrowing


(Bloomberg) -- Benchmark sovereign bonds in India tumbled by the most in more than three years after Prime Minister Narendra Modi’s government increased borrowing by more than half to cover revenue lost due to the virus-induced slowdown.

The yield on 10-year bonds climbed 20 basis points to close at 6.17% after surging by as much as 27 basis points, the most since February 2017. The administration late Friday said it will borrow 12 trillion rupees ($159 billion) for the fiscal year started April 1, up from the budgeted 7.8 trillion rupees. The nation’s stocks climbed as the ramped-up borrowing plan stoked bets of the government announcing a bigger fiscal stimulus.

The surge in borrowings is renewing calls for the Reserve Bank of India to step up support for the debt market, which has seen global funds flee as the government contends with its first economic contraction in more than four decades. There’s also a risk that corporate borrowers will get crowded out or have to pay higher financing costs.

India Bonds Drop by Most Since 2017 on Modi’s New Borrowing

“It won’t be an exaggeration to say that the government’s revised borrowing program has come as a rude shock to the bond market,” said A. Prasanna, chief economist at according to ICICI Securities Primary Dealership Ltd. The RBI will have to step up open-market purchases or implement more of the Operation Twist program, he said.

‘Explicit Support’

The central bank has bought a net 910 billion rupees of debt in the secondary market over four weeks, and recently revived the so-called Operation Twist program, where it sold bills and bought bonds. It hasn’t announced any large scale bond-purchase plans.

“If we do not hear from the RBI what kind of explicit support they are going to provide to the borrowings, the selloff in bonds will deepen further,” said Vijay Sharma, executive vice president for fixed-income at PNB Gilts Ltd. “They would have to take almost all of the extra supply.”

Market participants, including a former RBI governor, have said the central bank should consider buying sovereign bonds at auctions. Although the practice, known as monetizing debt, has been banned by law since 2006, the government can use an escape clause if the fiscal deficit is expected to be 0.5 percentage points above the targeted shortfall for the year.

The fiscal gap is likely to be around 5.5% of GDP for the year to March 2021, a finance ministry official with knowledge of the matter said Monday. There’s no plan by the RBI to buy debt directly and the government may end up borrowing less than the revised target of 12 trillion rupees, the official said, asking not to be identified citing rules on speaking to the media.

The yield on top-rated 10-year corporate notes rose as much as 20 basis points, traders said. That would be the biggest jump since April 16, Bloomberg-compiled data show. The yield on new 10-year sovereign bond, which began trading at a coupon rate of 5.79% on Friday, climbed 18 basis points to 5.89%.

Here’s what other analysts are saying:

Barclays Plc (Ashish Agrawal, FX and EM macro strategist)

  • Expect the “government bond curve to bear steepen and IGBs to underperform OIS on unwinding of short-term positions as market participants reduce duration risk. This could extend if there’s no sign of RBI buying”
  • Still, “it is premature to turn bearish as RBI purchases could offset this pressure. The RBI could offset bulk of the pressure if it extends duration by 2-3 trillion rupees in FY 21”

Nomura Holdings Inc. (Dushyant Padmanabhan, Singapore-based rates strategist)

  • Expect imminent operations from RBI to bring down the bond yields
  • Remains long on 10-year govt bonds and sees several supportive factors like increased demand from banks flush with liquidity, expectations of further rate cuts and safe-haven demand from investors

Standard Chartered Plc (Nagaraj Kulkarni, rates strategist in Singapore)

  • “We expect the short end of the IGB curve to remain well-anchored to money-market rates, while the long end may remain elevated due to supply pressure. We expect the IGB curve to trade with a steepening bias.”
  • “Notwithstanding these drivers, we believe the RBI’s market-supportive actions will determine the range of IGB yields and the steepness of the curve”

©2020 Bloomberg L.P.

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