Rajan's 2015 Rate Cuts Offer No Cheer for Bonds Battered by Modi

  • Record government borrowing plan, Fed rate bets capped gains
  • Central bank lowered interest rates by the most since 2009

India’s bond traders are a disappointed bunch. 

The four interest-rate cuts by Reserve Bank of India Governor Raghuram Rajan in 2015, crude oil prices at a six-year low and more room for foreigners in the debt market aren’t giving them enough reason to cheer. That’s because Prime Minister Narendra Modi took most of those gains away with his record borrowing program.

Indian bonds didn’t get anywhere close to matching the rally they saw last year, which was the best since 2008. The supply of notes forced primary dealers to buy unsold notes to rescue the last two sovereign-debt auctions, signaling poor demand.

“It’s very difficult for me to think that anybody would have made any real money,” said Gopikrishnan MS, Mumbai-based head of foreign exchange, rates and credit for South Asia at Standard Chartered Plc. “State-run banks, the biggest buyers of government bonds, are obviously worried. They keep buying, the yields keep going up, they keep losing money.”

Government borrowings and outflows from local-currency debt in the run up to the U.S. interest-rate increase have pressured Indian bonds. Investor sentiment also soured as deficient monsoon rains threatened to stoke food inflation and opposition parties made it harder for the government to push through economic reforms.

The 10-year yield fell just 12 basis points in 2015 to 7.74 percent even as the RBI cut the repurchase rate by 125 basis points. That widened the spread between the two to the highest since April 2014. The yield eased 97 basis points last year, the most since 2008, as the repo rate rose 25 basis points.

“We are definitely disappointed with the way the yields have panned out despite the rate cuts,” said Vijay Sharma, New Delhi-based executive vice president for fixed income at PNB Gilts Ltd., a unit of Punjab National Bank.

The following four charts show why traders have reason to be displeased with 2015:

CHART 1.

On a borrowing spree
On a borrowing spree

CHART 2.

Yield rises as oil drops
Yield rises as oil drops

CHART 3.

Fed Fears
Fed Fears

CHART 4.

Great divide: Spread between the 10-year yield and the benchmark repo rate
Great divide: Spread between the 10-year yield and the benchmark repo rate
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