Short Bonds Lead Gains as India Central Bank Ramps Up Support

(Bloomberg) -- India’s bond markets, reeling under increased supply from the government’s record-borrowing plans, won a reprieve from the central bank.

The Reserve Bank of India cut the reverse repurchase rate to free up more cash for lending, fueling a rally in short-end bonds even as it dashed market hopes of massive debt purchases from the open market.

The yield on the 6.18% 2024 bond fell 26 basis points to 5.48%. The benchmark 10-year yield, in comparison, slid nine basis points to 6.35% after dropping as much as 15 basis points before the measures were announced.

“Short-term yields dropped more as the reverse repo rate was reduced,” said Avnish Jain, head of fixed income at Canara Robeco Asset Management in Mumbai. “Markets are awaiting the government’s stimulus plans and its impact on fiscal deficit and gross borrowings.”

Friday’s measures, taken as a whole, weren’t as strong as some debt market participants had expected. Traders were hoping for more substantive steps like a calendar for debt purchases, with some even calling for dramatic moves like the RBI buying government debt directly.

“The market is disappointed as there weren’t any concrete measures for the government bond market,” said Lakshmi Iyer, chief investment officer debt at Mumbai-based Kotak Mahindra Asset Management. “In the absence of any indication of support via open-market bond purchases, it would be a challenge to meet such a huge supply of government bonds. Longer yields may remain under pressure.”

With Prime Minister Narendra Modi’s government embarking on a record-borrowing spree, the bond market has slumped in the past two weeks. Primary dealers for sovereign debt auctions demanded higher underwriting fees for a second week in a row, underscoring market concerns over an oversupply.

Following the early Friday announcements, authorities did manage to sell 200 billion rupees of debt as planned.

Among other steps, the RBI said it would provide 500 billion rupees of cheap money to banks to buy bonds of shadow lenders, and enhanced a ways-and-means advance facility available to authorities.

“These are part of a series of announcements to address different sectors of economy,” said Saurabh Bhatia, head of fixed income at DSP Investment Managers. “A reverse repo cut can aid to steepen the yield curve for now till the RBI brings in a next round of measures to address the demand-supply gap in the long-end like OMOs and monetization.”

Tough Predicament

India’s predicament is mirrored in other Asian markets, as governments compete for funding to combat a coronavirus-driven slowdown. While central banks in Australia and New Zealand have embarked on massive bond purchases, capping borrowing costs, the RBI has largely refrained from such measures.

The government has already unveiled a $2.6 billion fiscal stimulus for the poorer sections and further announcements are imminent.

“The deficit financing plan ahead is quite murky,” said Suyash Choudhary, head of fixed income at IDFC Asset Management in Mumbai. “To be fair to the RBI, it may be awaiting the actual announcement of borrowing before unveiling the absorption plan.”

The government is selling 450 billion rupees of debt, including Treasury bills, every week for the first half of the fiscal year to help fund Modi’s borrowing plan of 4.88 trillion rupees during this period. The weekly debt issuance is about 20% higher than a year ago.

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