Indian five hundred rupee banknotes are arranged for a photograph in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Fiscal Trilemma Is Keeping Bond Buyers On The Edge, Says JPMorgan’s Sajjid Chinoy

India’s bond market will continue to remain “rangebound and subject to a lot of uncertainty” unless the country addresses the “fiscal trilemma” suppressing the market.

That’s the word from JPMorgan’s Chief India Economist Sajjid Chinoy who pointed to a growing demand-supply mismatch in the bond market over the the last six months.

On the demand side, there is a reduction in “financial repression” as the Reserve Bank of India has brought down the statutory liquidity ratio and the hold-to-maturity ratio in tandem over the last four to five years, he told BloombergQuint in an interview. While this means that banks are no longer “captive buyers" of government bonds, it also exposes them to mark-to-market risks, he added. Besides, the government is understandably wary of dramatically increasing foreign portfolio investment limits in India’s bond market, he pointed out.

On the one hand if you are reducing financial repression and consolidated supply or deficit is not coming down in tandem, and we have limits on how much foreigners can buy. Something has to give.
Sajjid Chinoy, Chief India Economist, JPMorgan

The solution here would be to lower the country’s fiscal deficit, Chinoy said. While the Centre has been on a path of reduction, state governments’ borrowing have expanded. “So consolidated borrowing has only reduced from 6.7 percent to 6.4 percent over the last five years,” he said.

The government’s near-record bond sales worth Rs 6.06 lakh crore is just weeks away. The Narendra Modi government is especially dependent on these borrowings ahead of the general elections early next year.

Chinoy hopes some of the fiscal uncertainty will go away when the borrowing programme for next financial year is announced. The one upshot, according to him is that if India’s credit growth remains soft towards the end of the year, banks will consider buying more bonds.

There is also a case for easing FPI limits in the bond market by increasing the definition of the special limit, which currently includes sovereign wealth funds and central banks, Chinoy suggested. “That would allow long-term investors into the bond market without increasing volatility.”

Watch the full interview here.