India’s Failed Debt-Quota Sale Signals Faltering Overseas Demand

  • Target missed as faster inflation reduces odds of rate cuts
  • A three-month rally in 10-year bonds has stalled in May

India failed to meet its goal at an auction of debt-investment quotas for the first time in three years, signaling overseas demand is faltering as accelerating inflation reduces odds of more interest-rate cuts.

Foreigners bid for 29.6 billion rupees ($442.6 million) of quotas at Monday’s sale, compared with 33.4 billion rupees on offer, according to a statement from the National Stock Exchange of India Ltd. The last time such an auction was partially subscribed was in June 2013.

India currently caps overseas ownership of its sovereign debt at 1.4 trillion rupees. Foreign portfolio investors are required to bid for quotas once their holdings exceed 90 percent of the ceiling. The nation’s 10-year bonds have declined in May, halting a three-month rally, as inflation quickened amid higher food and oil prices. Reserve Bank of India Governor Raghuram Rajan, who has lowered the benchmark rate five times since early 2015, will cut it just once more this year, to 6.25 percent, and hold until the end of 2017, according to the median estimate in a Bloomberg survey.

“There is no rush among foreigners to buy government bonds as visibility on further rate cuts is limited,” said Vivek Rajpal, an interest-rate strategist at Nomura Holdings Inc. in Singapore. “Oil prices are making new highs, which adds to the uncertainty about inflation and the performance of Indian bonds.”

Debt Returns

Local-currency debt handed investors a 0.1 percent gain in the past one week, lagging returns in the Philippines, Indonesia and Malaysia, indexes compiled by Bloomberg show. Foreign institutional investors had exhausted 97.6 percent of their investment limit as of May 12, data from National Securities and Depository Ltd. show. Monday’s auction was announced on May 13.

The yield on government notes due January 2026, the current 10-year benchmark, was little changed at 7.45 percent at the close in Mumbai, according to prices from the central bank’s trading system. The yield has risen one basis point in May after sliding 20 basis points in the previous three months. The rupee fell 0.1 percent in a fourth day of declines to 66.8750 a dollar, prices from local banks compiled by Bloomberg show.

Consumer prices rose 5.39 percent in April from a year ago, official figures showed last week, rebounding from March’s six-month low and exceeding the median 5.05 percent forecast in a Bloomberg survey. Wholesale prices advanced for the first time in eighteen months, a separate report showed Monday.

Foreign holdings of all rupee-denominated corporate and government debt fell by 6 billion rupees on Monday, the biggest decline since April 26, to 3.41 trillion rupees, NSDL data compiled by Bloomberg show.

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