India's fiscal trilemma may create a fragile bond-market equilibrium

A reduction in financial repression, without a commensurate reduction in the fiscal deficit, and a wariness to open foreigner limits more aggressively create a fragile bond-market equilibrium

For much of the last few years, India has been considered a “safe haven” amongst emerging markets, reflecting dramatically-improved macro fundamentals since the taper tantrum. Against this constructive backdrop, the stress in the government bond market creates a jarring dissonance. Before the government’s announcement to reduce market-borrowing this week, Indian bonds had sold-off 120 bps since August. In comparison, the US Treasuries sold-off 65 bps, while most other emerging markets witnessed bond rallies (eg Brazil, Indonesia, Malaysia, Thailand) or modest sell-offs (South Africa, China, Korea), averaging less than 30 bps. By any yardstick, India has been an outlier. 

As a consequence,