Investors in India’s $950 billion sovereign bond market are on tenterhooks this week as they await another huge borrowing plan from the government and central bank guidance on measures to support the market.
Consensus is for bond sales to remain elevated in the fiscal year starting April when Prime Minister Narendra Modi’s administration outlines its budget later on Monday, adding to upward pressure on yields. This sets the scene for the Reserve Bank of India’s meeting on Friday, with traders clamoring for signs on how policy makers may drain excess liquidity from the system.
“It’s a critical week for the bond market with these two big events that are going to give direction to yields,” said Harish Agarwal, a bond trader at FirstRand Bank in Mumbai. “The market will eagerly await the RBI’s stance on liquidity and cues on how it plans to take it out, and its support for the government’s borrowings.”
Check Budget live updates here
The RBI refrained from draining excess cash in its December review as it didn’t see ample liquidity, which crashed short term rates, fueling inflation. That prompted traders to push back liquidity withdrawal bets to later this year. However, the RBI’s move to drain 2 trillion rupees ($27 billion) from the banking system in January surprised the market, causing short-term rates to surge.
Since then one round of open market bond purchasing by the central bank and speculation of RBI purchasing notes in the secondary market have only managed to provide temporary relief.
Expectations that debt issuance will stay heavy are adding to market angst. Sovereign debt sales for the 12 months starting April are likely to be 10.6 trillion rupees, according to a Bloomberg survey. That’s less than the record 13.1 trillion rupees for this fiscal year but still 75% above the previous five years’ average.
In a sign of market stress, the RBI canceled the sale of the benchmark 10-year bond on Jan. 22 as traders sought higher yields while also asking primary dealers to rescue the bulk of shorter-maturity notes. Yields on debt maturing in 2025 jumped 20 basis points this month while the 10-year yield is up four basis points.
Check latest news on Budget here
All eyes are on whether RBI Governor Shaktikanta Das once again reiterates his support for the debt market, though most expect a measured approach, where the central bank keeps long-end yields grounded to facilitate government borrowing, while keeping liquidity on a tight leash.
“The markets would want the RBI to indicate its upfront support, but it’s going to be tactical,” said Pankaj Pathak, fixed income fund manager at Quantum Mutual Fund.
Below are the key Asian economic data and events due this week:
Monday, Feb. 1: Federal India budget, Indonesia CPI, South Korea trade and manufacturing PMIs across Asia
Tuesday, Feb. 2: Australia rate decision, South Korea CPI, Japan monetary base
Wednesday, Feb. 3: Thailand rate decision, RBA’s Lowe’s speech, South Korea FX reserves, New Zealand unemployment, composite and services PMI across in China, India, Australia, Japan
Thursday, Feb. 4: Japan foreign buying of bonds and stocks, New Zealand business confidence, Australia trade balance
Friday, Feb. 5: RBI rate decision, RBA’s quarterly monetary policy statement, Indonesia GDP, South Korea’s current account, CPI in Thailand, Philippines and Taiwan, FX reserves in Australia, Indonesia and Thailand, retail sales in Australia and Singapore
Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.
As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.
Support quality journalism and subscribe to Business Standard.