India Bonds Slide on Debt Plan as Traders Say Worst Fear Is True

(Bloomberg) -- Indian bond yields spiked after the government said it would borrow an additional 500 billion rupees ($7.79 billion) by selling bonds to tide over the impact of slowing revenue.

The benchmark 10-year yield jumped by the most since February as the central bank said late Wednesday the government will borrow 930 billion rupees in the three months through March, more than twice the amount for the same period announced in September. The government will also borrow an extra 230 billion rupees through treasury bills. The rupee touched a one-week low intraday.

The higher-than-anticipated borrowing comes at a time the bond market is grappling with a potential end to accommodative monetary policy, rising debt supply from states and climbing crude oil prices. The additional borrowing is seen putting pressure on the government’s aim to cap its deficit for the current financial year at 3.2 percent of gross domestic product.

“The worst fears of the bond traders have come true,” IDFC Bank economists Indranil Pan and Aditya Vyas wrote in a note to clients. The extra borrowing “implies that the government could be heading toward an additional fiscal gap of approximately 0.4 percent of GDP in FY18,” they wrote.

The benchmark 10-year bond yield rose 18 basis points to 7.40 percent, the biggest one-day increase since Feb. 8 and a level last seen in July 2016. Sovereign bonds are headed for their fifth month of losses, with yields surging nearly 100 basis points since the end of July.

The rupee weakened as much as 0.2 percent before recovering losses to end 0.1 percent higher at 64.08 to a dollar.

The higher borrowings come after the finance ministry said earlier this week that collections from the goods and services tax slowed in November. Total revenue from GST fell 3 percent to 808.08 billion rupees. The government is grappling with ways to raise revenues to meet its fiscal deficit target, including renewing a demand to the central bank to transfer additional dividend of 131.40 billion rupees, people with knowledge of the matter said.

Citigroup Inc. raised its forecast for the nation’s bond yields after the extra borrowing was announced. The 10-year yield is now expected to trade in a 7 percent to 7.35 percent range, from an earlier 6.9 percent to 7.25 percent, the company said in a note Wednesday.

To contact the reporter on this story: Subhadip Sircar in Mumbai at ssircar3@bloomberg.net.

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Ravil Shirodkar, Nicholas Reynolds

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