India is struggling to sell its bonds at recent auctions, and that’s even before Prime Minister Narendra Modi embarks upon a record borrowing programme.

Underwriters rescued a longer-tenor bond sale on Friday following poor buying support that’s seen the bid-to-cover ratio, a gauge of demand, drift lower in the last two auctions from levels seen in January.

Concerns about an over-supply of longer maturity bonds have increased after the government on February 1 said it plans to borrow almost $100 billion for the year starting April 1. At the same time, the nation’s sovereign yield curve has steepened after the RBI sprung a surprise rate cut two weeks ago and left the door open for another reduction as early as April.

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There’s been poor demand from banks and investors at the longer end of the curve, said Kuldeepsinh Jagtap, Senior Vice President at ICICI Securities Primary Dealership Ltd. Longer-end bonds may continue to see relatively poor bidding till the borrowing calendar for first half of fiscal 2020 is announced.

The deteriorating fiscal outlook, heavy supply of government bonds and a slowdown in the pace of bond buybacks are expected to lead to a higher risk premium at the long-end of the curve, HSBC Holdings Plcs said in a note. The bank is mildly bearish on local sovereign bonds and forecasts the 10-year yield to rise to 7.5 per cent by end-June. The yield slid 3 basis points to 7.34 per cent on Wednesday.

The yield on the most-traded 2028 sovereign bond has climbed 17 basis points since the year started, raising borrowing costs for the government. The next auction is due on February 22.

Investors are also contending with an increased supply of state debt. The RBI will sell up to Rs 2,26,000 cr of bonds in the January-March period, more than market expectations of up to Rs 2,00,000 cr, according to Edelweiss Securities Ltd.

The key positive is a more dovish RBI, but support for bonds won’t extend beyond the one-two year tenors, Eugene Leow, a rates strategist at DBS Bank Ltd, Singapore, said.

Oil prices rebounding to a three-month high of $55.9 a barrel is another negative, and if they hold at those levels, or advance, could dash market expectations of an April rate cut. It is a small dampener perhaps, said Leow. I would get more worried when Brent crude prices are closer to $75 a barrel.

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