Indian markets have a blast with $32B bazooka for banks
mumbai — Indian sovereign bonds fell on speculation a government plan to issue special debt to recapitalise state-run lenders will crimp demand for existing notes. Equities rallied to a record and the rupee erased losses in late trade to end higher.
Prime Minister Narendra Modi’s administration will inject an unprecedented ₹2.11 trillion ($32 billion) into the banks over two years to revive growth. The government will sell ₹1.35 trillion of recapitalisation bonds while banks will raise another ₹760 billion through “budgetary support” and from the market, according to announcements made late on Tuesday.
The S&P BSE Sensex jumped as much as 1.6 per cent before closing 1.3 per cent higher at a record. State Bank of India, the nation’s largest, surged 28 per cent to be the biggest gainer on the gauge. The yield on 6.79 per cent notes due May 2027 rose three basis points to 6.81 per cent in Mumbai.
The rupee gained 0.3 per cent to 64.8975 per dollar, erasing an intraday drop of 0.2 per cent. The bank funding plan is a short-term negative for the rupee as markets are likely to focus on the potential impact on macro stability as India’s debt-to-GDP ratio rises, Standard Chartered analysts wrote in a report on Tuesday. The move is a clear rupee-positive in the long run, they wrote.
“The proposed infusion is a sizeable jump over what had been pledged before as India is seeking to plug a large part of the core equity gap at the state-run banks,” said Jobin Jacob, a Mumbai-based associate director at Fitch Ratings. This addresses “weak core capitalisation, one of the key drivers for our negative outlook on the South Asian nation’s banking sector.”
Moody’s Investors Service analyst Srikanth Vadlamani said the move is a “significant credit positive” for India’s state-run banks. The amount of capital pledged is enough to address the lenders’ solvency challenges and recapitalize them adequately, Vadlamani, who is vice president of the financial institutions group at the of Moody’s, said by phone.
Concern that the government will miss its target to restrict the fiscal deficit to 3.2 per cent of GDP in the year to March has been weighing on rupee sovereign bonds. The benchmark 10-year yield is set for a third monthly advance, set for the longest stretch since April 2015. — Bloomberg unit