Record borrowing for short-lived India’s improbable bond rally


A relief rally driving India’s sovereign bonds could end in a few weeks.

Canceled auctions and a dovish decision by the central bank have sent benchmark yields down more than 20 basis points over the past two weeks. Half of that will unwind just before the start of India’s record-breaking borrowing plan in April, according to a Bloomberg survey of 12 analysts and traders.

By the end of the year, 10-year yields could hit a 2019 high as the government implements an ambitious plan to sell some 15 trillion rupees ($200 billion) of debt, says investigation. And while the Reserve Bank of India has refrained from raising interest rates, it is also unlikely to revert to pandemic-era bond-buying measures.

“Indian bonds find themselves uneasy between a large borrowing program and the assurance of a delayed monetary policy normalization,” said Churchil Bhatt, executive vice president of Kotak Mahindra Life Insurance Co. Going forward, we expect policy normalization to be disappointing and more or less predictable, so demand and supply and not monetary policy should be the primary market driver.

Yields on 10-year bonds could climb to 6.75% by the end of the first quarter and 7.23% by the end of December, according to the survey. They were at 6.69% on Monday.

While Reserve Bank of India Governor Shaktikanta Das said this month that the central bank, which also serves as the government’s debt manager, would focus on completing the borrowing plan, he did not propose specific support measures for the bond market.

Given that the RBI has started to eliminate excess liquidity, it is unlikely to return to buying bonds in the market anytime soon. Last year it bought 2.2 trillion rupees of debt before ending its bond buying program in October.

Concerns about higher inflation with crude oil prices above $90 a barrel also raise questions about when the RBI should start raising rates.

If the central bank backtracks, the market could settle for some Rs 4-5 trillion of buying support over the next fiscal year, according to Kotak Mahindra Bank Ltd.

“Bond yields are likely to rise over the next few quarters unless RBI bolsters demand with substantial buying volume,” said Badrish Kulhalli, head of fixed income at HDFC Life Insurance Ltd.

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