Investors in India’s $950 billion sovereign bond market are on tenterhooks this week as they await another huge borrowing plan from the government and central bank guidance on measures to support the market.
Consensus is for bond sales to remain elevated in the fiscal year starting April when Prime Minister Narendra Modi’s administration outlines its budget later on Monday, adding to upward pressure on yields. This sets the scene for the Reserve Bank of India’s meeting on Friday, with traders clamoring for signs on how policy makers may drain excess liquidity from the system.
“It’s a critical week for the bond market with these two big events that are going to give direction to yields,” said Harish Agarwal, a bond trader at FirstRand Bank in Mumbai. “The market will eagerly await the RBI’s stance on liquidity and cues on how it plans to take it out, and its support for the government’s borrowings.”
The RBI refrained from draining excess cash in its December review as it didn’t see ample liquidity, which crashed short term rates, fueling inflation. That prompted traders to push back liquidity withdrawal bets to later this year. However, the RBI’s move to drain 2 trillion rupees ($27 billion) from the banking system in January surprised the market, causing short-term rates to surge.
Since then one round of open market bond purchasing by the central bank and speculation of RBI purchasing notes in the secondary market have only managed to provide temporary relief.
Expectations that debt issuance will stay heavy are adding to market angst. Sovereign debt sales for the 12 months starting April are likely to be 10.6 trillion rupees, according to a Bloomberg survey. That’s less than the record 13.1 trillion rupees for this fiscal year but still 75% above the previous five years’ average.
In a sign of market stress, the RBI canceled the sale of the benchmark 10-year bond on Jan. 22 as traders sought higher yields while also asking primary dealers to rescue the bulk of shorter-maturity notes. Yields on debt maturing in 2025 jumped 20 basis points this month while the 10-year yield is up four basis points.
All eyes are on whether RBI Governor Shaktikanta Das once again reiterates his support for the debt market, though most expect a measured approach, where the central bank keeps long-end yields grounded to facilitate government borrowing, while keeping liquidity on a tight leash.
“The markets would want the RBI to indicate its upfront support, but it’s going to be tactical,” said Pankaj Pathak, fixed income fund manager at Quantum Mutual Fund.