India’s Bonds Advance as Unchanged Borrowing Plan Offers Relief
The portrait of Mahatma Gandhi is displayed on an Indian 2,000 rupee banknote in an arranged photograph in Thailand. (Photographer: Brent Lewin/Bloomberg)

India’s Bonds Advance as Unchanged Borrowing Plan Offers Relief

(Bloomberg) -- Sovereign bonds gained as the government stuck to its fiscal second-half borrowing plan, providing comfort to a market that has sold off in recent months on worries about a wider budget gap and heavy supply.

The 7.32%, 2024 bond yield was down five basis points to 6.32% while that on the 2033 note fell three basis points. The benchmark 10-year debt saw a modest drop in yield, partly because a new 2029 paper has been announced.

Yields have risen 33 basis points in the past two months, the longest stretch of losses in a year, on concerns the surprise $20 billion tax cut will add to the government’s already record borrowings. Even an expected interest-rate cut by the central bank on Friday -- the fifth for the year -- did little to stem the declines.

“With no overshoot in second-half borrowing program compared with budget target, expectations of an additional 40-50 basis point rate cut from the RBI till March 2020 and with continuing liquidity surplus, we expect 10-year yields to come off in the near term,” Indranil Pan and Gaura Sen Gupta, economists at IDFC First Bank wrote in a note.

India’s Bonds Advance as Unchanged Borrowing Plan Offers Relief

The coupon on the new 10-year paper is expected to see a cut-off of about 6.45%-6.50%, they wrote. A lower coupon on a new benchmark security typically tends to pull down the rest of the yield curve.

The government will sell 2.68 trillion rupees ($38 billion) of bonds in the six months beginning Oct. 1, Economic Affairs Secretary Atanu Chakraborty told reporters in New Delhi on Monday. India, which had targeted to borrow 4.42 trillion rupees in the fiscal first-half, will stick to its goal of narrowing the budget gap, he said.

The administration has no plans to raise funds via overseas borrowing for now, Chakraborty said.

Steeper Curve

The average weekly size of the auctions is between 140 billion rupees to 160 billion rupees spread over 17 weeks. Borrowings are mostly concentrated in the 10-14 year bucket, accounting for about 41% of the second-half gross borrowing, up from 30.4% in the previous year.

“The yield curve is likely to continue to steepen amid higher dated supply, debt switch and nearing the end of the rate-cut cycle,” Kotak Mahindra Bank said in a note.

Doubts Linger

Traders though remain cautions. The shortfall from the tax stimulus and the lower run rate in collections from income tax and goods and services tax is expected to only partly be offset by higher dividend from the central bank, according to Kotak.

Raising funds through assets sales remains key, with the government setting a stiff 1.05 trillion rupees target for the fiscal year.

India will seek cabinet panel approval for selling stakes in Shipping Corp. of India, Container Corp. of India and Bharat Petroleum Corp., an official told reporters in New Delhi on Tuesday.

©2019 Bloomberg L.P.

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