India’s bond rout touches 20-year low

mumbai — India’s bond rout is deepening as Prime Minister Narendra Modi’s expansionary budget prompts a hawkish turn from the central bank.

Expectations for rate hikes are building after minutes of the Reserve Bank of India’s February 6-7 meeting released on Wednesday showed there was concern that inflation already running at faster than 5 per cent will accelerate. Onshore markets are pricing in an increase of about 45 basis points in the benchmark repurchase rate over the next 12 months, said Vivek Rajpal, a rates strategist at Nomura Holdings in Singapore.

India’s public finances are worsening after deficit targets were widened in the budget this month and amid concern over the inflationary impact of rising oil prices and wage hikes for millions of government employees. State-run banks, the biggest holders of sovereign notes, have turned net sellers this year after being hurt by losses. With no local interest and foreigners hemmed in by limits, there doesn’t seem to be any buyers for the debt.

“Indian bonds are seeing capitulation and the pain gets aggravated by every incremental piece of negative news,” said Sandeep Bagla, associate director at Trust Capital Services India in Mumbai. “Policy makers need to step in to curb the rout and revive investors’ confidence either by allowing more foreign investors or giving assurance on liquidity.”

The yield on the nation’s 10year notes rose seven basis points to 7.78 per cent and touched a 2-year high, taking this month’s increase to 35 basis points. The debt is headed for a seventh monthly drop, which would be the longest run of declines in data going back 2 decades. — Bloomberg