A customer withdraws a stack of Indian twenty rupee banknotes at a branch (Photographer: Dhiraj Singh/Bloomberg)

Record Debt Sales Push Indian Bonds to Worst Day Since May

(Bloomberg) -- Sovereign Indian bonds yields surged the most in eight months and rupee weakened after Prime Minister Narendra Modi’s government announced record borrowings to fund populist policies before elections by May.

The administration plans to borrow 7.1 trillion rupees ($100 billion) in the year starting April 1, Finance Minister Piyush Goyal said in his interim budget speech on Friday. That compares with a 6.4-trillion rupee forecast in a Bloomberg News survey and a revised 5.71 trillion rupees for the current fiscal period.

Higher sales will weigh on an already jittery bond market that has sold off in the past four of six weeks on concern the government may sacrifice fiscal discipline to woo farmers, a key voting block, with massive cash plans. The government will give handouts to farmers totaling 750 billion rupees annually, and give taxpayers 185 billion rupees of relief, Goyal said.

“Continued fiscal slippages will only be viewed negatively, and this will remain as key overhang on sovereign rating,” said Prakash Sakpal, an economist at ING Groep NV. “Add to this the uncertainty about elections where a hung parliament can’t be ruled out. Against such a backdrop, Indian assets will remain under pressure.”

FY20 (in rupees)FY19 revised
Gross borrowings7.1 trillion5.71 trillion
Net borrowings4.73 trillion4.22 trillion
Switches500 billion280.6 billion

The yield on the most-traded 2028 bonds surged 13 basis points, the most since May, to 7.62 percent at the close in Mumbai. Yields on the new 10-year bond due in 2029 rallied nine basis points to 7.38 percent. The rupee slid 0.2 percent to 71.2550 per dollar, while the S&P BSE Sensex gauge of stocks pared gains of as much as 1.4 percent.

The measures will end up widening the deficit for this fiscal year to 3.4 percent of gross domestic product versus a previous target of 3.3 percent, and the shortfall target for the year ending March 2020 has been set at 3.4 percent.

Record Debt Sales Push Indian Bonds to Worst Day Since May

While the yield on 2028 bonds fell rapidly in the December quarter as oil slumped and the central bank boosted its debt purchases, worries about higher debt sales have re-emerged just as prices of oil -- India’s top import -- recovered last month. The yield on most traded 2018 bonds climbed 11 basis points in January after declining in the previous three months.

“Supply worries may increase as we get closer to the March-April period, when we will also have elections to worry about,” said Vivek Rajpal, a rates strategist at Nomura Holdings Inc.

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