India bonds slide on debt plan as traders say worst fear is true

Indian bond yields spiked after the government said it would raise an additional $7.79bn through bonds

Indian bond yields spiked after the government said it would borrow an additional US$7.79bn. Manish Swarup / AP.

Indian bond yields spiked after the government said it would borrow an additional 500 billion rupees (US$7.79bn) by selling bonds to tide over the impact of slowing revenue.

The benchmark 10-year yield jumped by the most since February as the central bank said late on Wednesday the government will borrow 930bn rupees in the three months through March, more than twice the amount for the same period announced in September. The government will also borrow an extra 230bn rupees through treasury bills. The rupee slipped to a one-week low.

The higher-than-anticipated borrowing comes at a time the bond market is grappling with a potential end to accomodative monetary policy, rising debt supply from states and climbing crude oil prices. The additional borrowing is seen putting pressure on the government’s aim to cap its deficit for the current financial year at 3.2 per cent of gross domestic product.

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“The worst fears of the bond traders have come true,” IDFC Bank economists Indranil Pan and Aditya Vyas wrote in a note. The extra borrowing “implies that the government could be heading toward an additional fiscal gap of approximately 0.4 per cent of GDP in FY18,” they wrote.

The benchmark 10-year bond yield rose 12 basis points to 7.34 per cent, the biggest one-day increase since February 8. Sovereign bonds are headed for their fifth month of losses, with yields surging more than 80 basis points since the end of July.

The rupee weakened 0.1 per cent to 64.1875 to a dollar in a third day of declines.

The higher borrowings come after the finance ministry said earlier this week that collections from the goods and services tax slowed in November. Total revenue from GST fell 3 per cent to 808.08bn rupees.

Citigroup raised its forecast for the nation’s bond yields after the extra borrowing was announced. The 10-year yield is now expected to trade in a 7 per cent to 7.35 per cent range, from an earlier 6.9 per cent to 7.25 per cent, the company said in a note Wednesday.