Bond Traders in India Brace for Borrowing Hike in Crucial Week

Indonesian Rupiah, Indian Rupee And Filippino Peso As Gloom Lifting From Asia's Emerging Currencies After Rate Hikes

Photographer: Brent Lewin/Bloomberg

Indian bond traders’ worst fears may be realized this week if Prime Minister Narendra Modi’s government announces a further increase to its mammoth borrowing plan.

Traders expect the government to lift its borrowing estimate for the October-March period to six trillion rupees ($81.5 billion) from the existing 5 trillion rupees, according to 10 out of 16 traders in a Bloomberg survey. The timing for this increase couldn’t be worse as the Reserve Bank of India is set to keep its policy rates on hold on Thursday amid a persistently high inflation.

“With no rate cut baked-in, the only thing the market is waiting for is the borrowing calendar, and cues in the RBI policy,” said Lakshmi Iyer, chief investment officer debt at Mumbai-based Kotak Mahindra Asset Management Co. “Additional borrowings will definitely spook the market if there isn’t a game plan to support extra sales.”

New Record

Government’s borrowings are seen rising to new highs

Finance Ministry, FY21 estimate based on Bloomberg survey

The additional borrowing could take full-year issuance to a new high of 13 trillion rupees from the current 12 trillion rupees target, according to Bloomberg calculations. But that’s not all. Additional supply from cash-strapped state governments is set to add to the market’s debt burden.

ICICI Securities Primary Dealership expects states to sell more than six trillion rupees of debt in the second half, double the amount from the preceding six months.

Borrowing Snapshot (in billion rupees):

Period Central Government States Total
1H Planned 6980 3055 10035
1H Actual 7660 3255 10915
2H Estimate 6040 6255 12395
Total FY21 13700 9610 23310
Source: ICICI Securities

Strains on the bond market are becoming evident amid the supply glut, with underwriters having to stepping in to rescue four of the past seven debt auctions.

The benchmark 10-year bond yields are also inching up. It had dropped from a four-month high touched in August after the RBI bought bonds outright on top of conducting a Federal Reserve-style twist, wherein it simultaneously buys long-term securities and sells short-term ones.

So far the RBI has used these measures sporadically to deal with yield spikes, but Bank of America sees it holding $75 billion of open-market bond operations by March to ensure smooth auctions. Expectations are for the RBI to keep the benchmark yield anchored below 6%, seven out of 12 traders in a separate Bloomberg survey said. The 10-year yield rose five basis points to 6.04% on Friday.

RBI seems to be holding 10-year yields around 6% levels: Traders

However, increasing bond sales may not be the only option for the government, according to some traders. Funds needed to stimulate the economy amid its worst contraction can also come from Treasury bill sales, according to AU Small Finance Bank.

“Unprecedented times call for unprecedented solutions,” said Debendra Dash, who doesn’t rule out a Bank Indonesia-style direct debt monetization by the RBI.

The government may also delay the potential increase in supply to shied the market from an immediate shock. Six out of the 16 traders surveyed see the issuance hike coming toward the latter part of the fiscal year, when the officials have a better visibility of revenues while six others expect no change.

Below are the key Asian economic data and events due this week:

  • Monday, Sept. 28: Malaysia trade balance and Japan business cycle index
  • Tuesday, Sept. 29: Japan CPI, South Korea industrial production, Australia consumer confidence
  • Wednesday, Sept. 30: China PMI, Japan industrial production and retail sales, Australia private credit, Singapore bank loans, Thailand current account and trade balance, India fiscal deficit
  • Thursday, Oct. 1: India and Philippines rate decision, Indonesia CPI, Japan foreign bond purchases and manufacturing index, South Korea trade and manufacturing PMIs across Asia
  • Friday, Oct. 2 : Japan jobless rate, New Zealand consumer confidence, Australia retail sales and Thailand FX reserves

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