Traders eye RBI for support as India bond rout worsens
TRADERS in India’s battered bond market want the central bank to play the role of a savior.
With the market reeling under the worst sell-off in almost two decades, investors say the Reserve Bank of India (RBI) should consider buying support as well as expand the quota limits for global funds. Absent that, they expect the declines to continue.
“To calm the bond market, the supply-demand maths has to fit in; meaning keep fiscal deficit in check and/ or find additional demand levers by increasing limits for foreigners or the RBI doing bond purchases,” said Mumbaibased Lakshmi Iyer, the chief investment officer for debt at Kotak Mahindra Asset Management Co., which oversees $19 billion in assets.
The nation’s sovereign bonds are set to decline for the sixth straight month in January, the longest stretch since 2000, amid elevated oil prices and hardening global yields. The yield is seen climbing as high as 8% in the fiscal year starting April 1, a level last seen in 2014, according to ICICI Securities Primary Dealership Ltd. The yield fell one basis point Wednesday to 7.42% as of 9:40 a.m. in Mumbai.
Allowing foreigners to buy more government debt will help absorb a record supply of bonds, which along with worries over accelerating inflation and wider deficits has spooked the market. Global funds bought 1.4 trillion rupees ($22 billion) of bonds in 2017, the most in four years, and the central bank has said it would raise the cap on overseas investors to 5% of outstanding bonds by March 2018.
Bond purchases will help comfort the market, Bank of America Merrill Lynch said in a note, forecasting $25 billion of such operations in the year starting April 1. It’s not the first time the central bank would have bought debt. In the year ended March 2017, the RBI injected 1.1 trillion rupees in liquidity, helping push down the yield to more than a sevenyear low even as the government sold a record amount of debt.
Open market operation purchases “would be the strongest signal” to allay concerns about the spike in yields, Indranil Sen Gupta, BofAML’s India economist wrote in the note.
The rout may lead to 155 billion rupees of mark-to-market losses on the available-for-sale portion of the banks’ investment portfolios in the December quarter, according to ICRA Ltd., a unit of Moody’s Investors Service. The declines prompted state-run lenders to ask the RBI to allow them to spread the losses over two quarters, the Economic
Times reported earlier this month. •