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Indian bonds dropped on concerns about a large government borrowing amid a nationwide lockdown that has diminished trading activity in Mumbai.
The benchmark 10-year bond yield surged as much as 17 basis points to 6.31 per cent on Friday, its biggest intra-day jump since September, with traders getting their first chance to react to the fundraising due to the holidays on Wednesday and Thursday. The rupee declined 0.5 per cent to 75.9125 per dollar.
The government said Tuesday it will sell 4.88 trillion rupees of bonds in the six months to September. That, along with treasury bill sales, translate to a weekly supply of at least Rs 45,000 crore, versus Rs 37,000 crore in the year-ago period. There is concern that the auctions may not lure enough demand as volumes dwindle because of the emergency restrictions.
The market is jittery about the fact that it faces a very heavy weekly bond sales calendar, said Debendra Dash, a Mumbai-based fixed-income trader at AU Small Finance Bank. Markets will demand higher yields at every auction unless the central bank does not come up with its open-market purchases.
In addition to the central government, Indian states also plan to auction about Rs 130000 crore of debt in the April-June quarter, higher than Rs 1,10,000 crore in the year-ago period. States raised their sales for the next week to Rs 36,000 crore as compared to an earlier plan to sell Rs 26,000 crore.
The fear is with larger segment operating from home, lower volumes and wider bid-ask spreads, markets may ask for relatively higher risk premia to address the demand supply equation, said Saurabh Bhatia, head of fixed income at DSP Investment Managers in Mumbai.
The central bank has injected 400 billion rupees via its open market purchases calm yields. It has also cut rates and offered to add about Rs 5000 crore through its various liquidity infusion programs. Earlier this week, it allowed foreigners greater access to sovereign bonds as the government begins its record 7.8 trillion rupees of debt sales.
All to little avail. Global funds have sold a net Rs 940 crore bonds this year, the highest in Asia.
Heavy debt issuance has prompted calls for the central bank to intervene by expanding its open-market purchases.
The RBI has to support the primary and secondary market, Chakravarthy Rangarajan, a former central bank governor told BloombergQuint on Wednesday. Monetization of debt is inevitable. A large borrowing in a short time cannot be managed without monetizing.
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