'Buy India' sovereign bonds chorus grows as demand outpaces supply

By Malavika Kaur Makol and Ronojoy Mazumdar

India’s $1.3 trillion bond market is facing a peculiar issue: investors can’t get enough of sovereign bonds as the government buys back debt and cuts borrowings, resulting in a supply shortage.
 

The administration repurchased nearly 245 billion rupees ($2.9 billion) of notes on Thursday. That follows last month’s reduction in its Treasury bill issuance by 400 billion rupees. The Reserve Bank of India also halted secondary market sales of bonds last week for the first time since July.

The supply crunch comes just as Indian bonds have emerged as top performers among major Asian nations, driven by their recent inclusion in global debt indexes. With the RBI’s pivot to a neutral monetary policy stance setting the stage for potential rate cuts, demand is expected to rise further.

The “RBI stance change will add fuel to fire as bond markets will start pricing in 50-75 basis points of cuts starting December,” said Sagar Shah, head of domestic markets at RBL Bank. “It is the first time in 2024 that demand for government bonds has outstripped supply.” 

Barclays Plc estimates the FTSE Russell inclusion this week to lure up to $9 billion. That’s in addition to the more than $18 billion that’s come in since JPMorgan Chase & Co.’s September 2023 announcement to add India to their main emerging-market index. A bond auction last week showed investors bidding nearly three times the amount government offered to raise. 

India slashed its borrowings for the fiscal year ending in March 2025 this year, in a bid to narrow its fiscal deficit. Short-term borrowing rates for India have been trending lower, as the government slows borrowing through Treasury bills. 

“For years we spent hours thinking who will buy Indian bonds, where demand was going to come from,” said Nathan Sribalasundaram, rates strategist at Nomura Holdings Inc. “Now we are worried there is not enough supply.”

India government bonds were “our highest conviction trade even before the change in the RBI stance and the FTSE announcement,” said Eric Lo, Asia fixed income portfolio manager at Manulife Investment Management in Hong Kong. “This increased demand should theoretically reprice the government bond yield curve lower,” he said. 

(Updates with bond buyback result in 2nd paragraph)
 

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