Fiscal stimulus is new unknown for bond market

With record borrowings slated to start in April, India’s bond markets are grappling with another unknown – the size of any additional fiscal stimulus to combat the coronavirus and how it will be funded.

Prime Minister Narendra Modi’s decision on Tuesday to put the nation under a three-week lockdown is seen as necessary to contain the spread of the virus, but it is also likely to bring an immediate hit to already sagging economic growth. Offsetting this is going to take a lot more spending, likely fueled by debt issuance.

The sovereign bond market is already showing signs of great strain. It froze for a half hour before trades started trickling in on Tuesday and yields have risen more than 30 basis points since dropping to a decade low of 5.99 per cent two weeks ago.

Finance Minister Nirmala Sitharaman has said the government will come out with an economic rescue package soon.

India could unveil a stimulus package of at least 1.5 trillion rupees ($20 billion) to fight the coronavirus as soon as the end of thi week, Reuters reported, citing government officials it didn’t identify. The government may raise its budgeted 7.8 trillion rupee borrowing plan for the fiscal year starting in April and ask the central bank to buy some government debt, the report said.

Jefferies estimates that the government could boost spending by $18 billion by making incremental increases to fuel taxes and widening the fiscal deficit target by a percentage point. Nomura Holdings Inc. sees the deficit potentially blowing out to more than 4% of gross domestic product for the 12 months beginning April, versus the 3.5 per cent budgeted.

Bond traders will be looking to the Reserve Bank of India for relief. Nomura expects a 50 basis points interest rate cut before or at the scheduled April 3 policy meeting.

“RBI will have to announce large open-market debt purchases or the government may have to resort to private placement of bonds with RBI if the crisis persists,” said Naveen Singh, head of fixed income at ICICI Securities Primary Dealership Ltd. in Mumbai.