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Traders in the Embattled Indian Sovereign Bond Market Finally have Something to Cheer

India bonds surge most since 2013 as Narendra Modi surprises on borrowing

Prime Minister Narendra Modi’s government in a surprise move announced 2.88 trillion rupees ($44.5 billion) of bond sales in the six months starting April 1, or about 48 percent of its annual borrowing plan, lower than than the 60 percent to 65 percent in previous years. The yield on the benchmark 10-year bonds plunged 25 basis points to 7.37 percent, set for its biggest slide since November 2013.

Lower bond sales ease one of the biggest worries for traders, who have been concerned about the government’s near-record borrowing as state-run banks, the main buyers of sovereign notes, stay away. Talks are also in progress with the central bank to raise limits for foreign investments in rupee debt, according to Economic Affairs Secretary Subhash Garg.

“This is the first step toward sustainable bull rally in bonds,” said Sandeep Bagla, associate director at Trust Capital Services India Pvt. in Mumbai. “This is an extremely smart move by the government, realizing the ground realities. This will lay ground for a handsome rally in bonds.”

The longest run of losses in India’s bond market since 1998 has been spurred by a vicious cocktail of rising debt supply, hardening global yields and the prospect of higher interest rates. Concerned by the selloff, the finance ministry last week met primary dealers to assess the market’s mood before the auctions, which normally begin in the first week of April.

Market Selloff

State-run lenders have been sellers of an average 5.09 billion rupees of sovereign bonds every day this year, data from the Clearing Corp. of India show. They bought an average 368 million rupees of debt daily in 2017. At the same time, overseas holdings of Indian government and corporate notes are set to decline for a second month.

Market participants are also speculating that policymakers will raise the limit for foreign investment in sovereign debt from the current 5 percent of the total outstanding.

The benchmark 10-year yield climbed 126 basis points in the last seven months. The surge has threatened to boost borrowing costs for Modi’s government and prompt a repeat of a recent situation when it had to pare the size of few auctions and scrap others.

“They want to ensure that the overall interest-rate structure in the economy remains well behaved,” said Vijay Sharma, executive vice president for fixed-income at PNB Gilts Ltd. in New Delhi. “If the yields keep going up, then all other rates in the economy go up. The bearish sentiment takes a backseat for now and we can see positive moves in bonds.”

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