Indian Sovereign Bonds Decline on Supply Concern, Budget Deficit

  • States to auction 207 billion rupees of debt on Tuesday
  • Borrowing amount highest in at least two years: India Ratings

Indian sovereign bonds declined, driving the 10-year yield higher by the most in almost three weeks, on speculation an increase in issuance by state governments will hurt demand for existing securities.

Twenty-one states plan to sell 207 billion rupees ($3 billion) of notes at an auction on Feb. 23, according to a central bank statement after trading closed on Thursday. Markets were shut Friday for a local holiday. The borrowing amount is the highest for any such sale in the last two years, according to India Ratings & Research Pvt. Quickening inflation and concern the government will struggle to meet its budget-deficit targets has weighed on bonds this year.

The yield on notes due January 2026 climbed four basis points, the most since Feb. 2, to 7.77 percent in Mumbai, according to prices from the Reserve Bank of India’s trading system. It has jumped 19 basis points since the securities were issued in early January.

“The higher state borrowing is coming at a time when appetite for bonds is already limited,” said Bansi Madhavani, an analyst in Mumbai at India Ratings, a unit of Fitch Ratings. “Yields are expected to stay high.”

Investors are concerned that a proposed increase in salaries for millions of civil servants coupled with demands for more rural support will derail Prime Minister Narendra Modi’s fiscal consolidation plans as his government prepares to deliver the annual budget on Feb. 29. Ten-year bonds capped a third weekly drop on Thursday after official data on Feb. 12 showed consumer prices rose 5.69 percent in January from a year earlier, the most in 17 months.

Debt Buyback

“There is a sense of caution ahead of the budget,” said Harish Agarwal, a Mumbai-based fixed-income trader at FirstRand Ltd. “There are expectations that the net supply of bonds may be higher in the next fiscal year” that begins April 1, he said.

India’s government repurchased 155.3 billion rupees of sovereign notes on Monday, according to a central bank statement.

The rupee fell 0.2 percent to 68.6050 a dollar, prices from local banks compiled by Bloomberg show. It declined to as low as 68.6925 earlier, near a record 68.845 seen in August 2013, before paring losses on speculation state-run lenders bought the currency on behalf of the central bank.

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