India to Lengthen Maturity of Debt Portfolio to Cut Repayments

India will lengthen the maturity of its rupee debt portfolio by replacing some notes due in the three years to March 2017 with 15-year securities.

The so-called bond switch is aimed at reducing “bunched-up” redemption pressure in the next two to three years, said Rajat Bhargava, joint secretary in charge of budget in the Ministry of Finance. Notes worth 1.68 trillion rupees ($31 billion) are maturing in the fiscal year ending March 31, 2015, budget documents show, 77 percent more than in the year starting April 1.

“The timing of the bond switch announcement will be important,” said Arvind Chari, a senior fund manager at Quantum Asset Management Co. in Mumbai. “The government needs to gauge the appetite for longer-dated securities, particularly in the backdrop of large debt supplies next year.”

The bond switch announcement follows Finance Minister Palaniappan Chidambaram’s proposal yesterday to buyback government notes worth 500 billion rupees in the 12 months through March 2014, also aimed at reducing redemption pressure. The switch program, which is estimated to cost 30 billion rupees, will work in tandem with repurchases, said Bhargava and is part of a strategy to effect “medium-term” fiscal correction, said Bhargava.

He didn’t say when the exercise will begin.

Accounting Issues

Bhargava said the gross borrowing target of 6.29 trillion rupees for the next fiscal year announced in the budget yesterday includes additional bond issuance of 500 billion for buybacks.

The government will need to redeem a combined 770 billion rupees of securities in April and May of 2014, according to budget documents.

Indian lenders, the largest holders of government bonds, are allowed to hold as much as 25 percent of their deposits to maturity without valuing them at the latest market prices. The hold-to-maturity accounting rule protects banks from losses and helps keep government borrowing costs low by encouraging them to buy debt.

Accounting issues may prevent banks from selling debt back to the government, according to Prasanna Ananthasubramanian, an analyst at ICICI Securities Primary Dealership Ltd. in Mumbai.

“Whether the buyback program will be successful is a little uncertain,” he said.

Apart from held-to-maturity, Indian lenders also hold debt in the held-for-trading category, where the assets have to be valued at current prices at least every month. Such securities must be sold within three months after they were bought.

Investments in the so-called available-for-sale grouping need to be valued every quarter. There is no compulsion to sell the securities marked under this category.

The government last bought back bonds through an auction in October 2010, central bank data show. While the finance ministry offered to repurchase 120 billion rupees of bonds, investors sold 21.48 billion rupees of notes.

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