Bond traders tussle with RBI on Modi’s large borrowing plans

By Kartik Goyal

Traders in India are once again testing the central bank’s pledge to support the government’s massive borrowings.

The tension is showing up in the benchmark 10-year bond as its yield keeps breaching 6 per cent, a level that’s seen as a line in the sand for the Reserve Bank of India. A near-record debt sale plan and concerns over fewer liquidity measures are spooking traders.

“The RBI is trying to fight this battle to keep yields closer to 6 per cent, but there is a humongous supply of bonds, with market filled to the brim,” said Vijay Sharma, executive vice president for fixed-income at PNB Gilts Ltd. “Unless the market has a view that the RBI will keep rates here or bring it down, only then will they will be gung-ho on bonds.”

Bonds yieldsBloomberg

The tussle between bond traders and the central bank for the past year has brought a public rebuke from Governor Shaktikanta Das, a meeting with bankers last month, and canceled auctions. Unlike other central banks, the RBI is seeking to tame borrowing costs without a quantitative easing program or yield-curve control even as Prime Minister Narendra Modi’s administration embarks on a spree of debt sales.

Modi wants to borrow 12 trillion rupees ($165 billion) for the fiscal year staring April, a little less than the record issuance set for the current year. To support the program, the RBI will seek to buy more than 3 trillion rupees of debt while capping the benchmark yield at 6 per cent, according to a person with knowledge of the matter.

Few incentives

The challenge though is growing market expectations that the RBI will start to wind back its accommodative measures as the economy recovers from the pandemic. Traders therefore see few incentives to buy bonds.

A global debt selloff this week as investors increasingly expect a wider recovery adds to the challenge.

“It will be difficult for the market to absorb outsized government borrowings for the second consecutive year, especially when interest rates have likely bottomed out and liquidity is normalising,” said Himanshu Malik, a fixed-income strategist at HSBC Holdings Plc in Hong Kong.

A government bond auction of 310 billion rupees, including a sale of 10-year benchmark paper on Thursday will be in focus after the RBI canceled auctions three times since December, with the most recent one being on Feb. 5.

Rate hike in 2022

The government is mulling borrowing less than usual in the upcoming fiscal first half to ease the pressure on the debt market, people with knowledge of the matter said Wednesday.

The debt supply is 5 trillion to 7 trillion rupees more than what the biggest players — banks, insurance and pension firms — can absorb, according to Nagaraj Kulkarni, a rates strategist at Standard Chartered Plc. He sees yields on the 10-year bond climbing to 6.60 per cent by end-December.

Kotak Mahindra Bank sees it rising to as high as 6.75 per cent in the fiscal year ending March 2022. It rose two basis points to 6.05 per cent on Thursday.

Strategists from Nomura Holdings Inc. and Bank of America are also starting to pencil in an RBI rate hike as early as 2022.

“The monetary policy cannot afford to be as accommodative as last year,” said B. Prasanna, group head of global markets ICICI Bank Ltd. “This tussle between upward pressure on bond yields and the RBI trying to manage the borrowing program will continue,” he said.

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