The $22 Billion That's Spooking India's Bond Market
Off-budget borrowing by state firms is adding strain and pushing up the cost of long-term money. Animal spirits are noticeably tame.
Reviving animal spirits.
Photographer: Dhiraj Singh/BloombergIndia’s economy is slowing, inflation is sputtering and the central bank is cutting interest rates. But the cost of long-term money is refusing to budge. The reason, in a single word: elections.
Polls will be called any day now. Prime Minister Narendra Modi probably would have liked to make his reelection bid with less distress in the farm economy and a better jobs track record. If he hadn’t scored an own goal by banning 86 percent of the country’s cash overnight, he might even have succeeded. Officially, Modi will end the fiscal year on March 31 with a deficit of roughly $90 billion, a pre-poll bump that doesn’t appear to have helped in pump-priming the economy.
It comes as little surprise that the country recorded its slowest GDP growth rate in five quarters, with more weakness expected in the three months ended March. That can only mean more disinflation and deeper interest-rate cuts. Why, then, is the 10-year Indian government bond yield still tracking at 7.4 percent, more than double the expected inflation rate for the year?