India Cuts Planned Extra Borrowing to $3.1 Billion; Bonds Climb

Updated on
  • Government planned to sell extra 500 billion rupees of debt
  • Sovereign bonds advance; 10-year yield drops 16 basis points

India said it would cut back on planned additional borrowing for the current fiscal year, providing relief to the nation’s sovereign bond market battered by concerns about rising inflation and worsening public finances.

The government will sell 200 billion rupees ($3.13 billion) of debt, down from 500 billion rupees extra announced less than a month ago, the finance ministry said in a statement Wednesday after a “review of trends of revenue receipts and expenditure pattern.” The reduction follows expectations of a higher dividend from the central bank, a finance ministry official told reporters in New Delhi asking not to be identified citing rules.

The yield on bonds due January 2028 -- the new 10-year bond -- dropped 16 basis points to close at 7.22 percent in Mumbai. That’s the most for the benchmark notes since November 2016. The rupee gained 0.2 percent to 63.89 per dollar, after falling 0.9 percent Tuesday.

Trimming bond sales will reduce supply-side pressures and “provide breathing space to the market,” said Sandeep Bagla, associate director at Trust Capital Services Pvt. in Mumbai. “Investors were bleeding due to the surge in yields and would shy away from making further commitments unless offered a higher yield, which may not have been in line with the current growth-inflation scenario.”

Benchmark 10-year sovereign yields advanced for a fifth month in December, the longest stretch since since 2000. Sovereign bonds have been spooked by higher supply of debt by the central and state governments and as worries over accelerating inflation and a wider budget deficit soured sentiment.

READ: Deepest India bond rout in 17 years shows no sign of abating

Yield on the new 10-year notes rose 11 basis points Tuesday after a central bank official warned banks they can’t keep relying on the regulator to manage their interest-rate risks. The spike may result in 155 billion rupees of mark-to-market losses on the available-for-sale portion of the banks’ investment portfolios in the December quarter, according to ICRA Ltd., a local unit of Moody’s Investors Service.

Lower borrowing may not be enough to reduce the budget deficit in the current fiscal year, which Nomura Holdings Inc. estimates at 3.5 percent of the gross domestic product, wider than budgeted 3.2 percent aim. That’s because the administration plans to borrow 1.79 trillion rupees through Treasury-bills in the March quarter.

The government probably realized that the additional borrowing is doing more harm than good, given the impact on yields, according to Vivek Rajpal, a rates strategist in Singapore at Nomura.

— With assistance by Shruti Srivastava

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