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India's Hot Bond Yields Put Chill on Debt

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02/27/2018 | 01:15pm CEST

By Manju Dalal and Debiprasad Nayak

A sharp rise in Indian bond yields is exposing a rift between the country's central bank and the financial institutions it governs.

Yields on 10-year Indian government bonds have climbed nearly half a percentage point since late December, when the Reserve Bank of India announced plans to increase its borrowing for the financial year ending in March.

The unexpected change sparked a bond-market selloff that traders say saddled many banks with losses among their holdings of government debt at year-end. Since then, some domestic banks and other investors have been reluctant to buy more bonds, traders say, and the government has scaled back its debt-issuance plans.

India's 10-year bond yield was recently 7.688%, up 0.35 percentage point since the start of this year and 1.2 percentage points above its level just six months ago, according to Thomson Reuters data. Corporate bond yields have risen in tandem, making it costlier for companies to borrow and putting a chill on debt sales in recent weeks.

Corporate-bond issuance has slowed sharply since the start of 2018, with sales totaling some $2 billion, versus $6 billion the same period a year ago, according to Dealogic.

Last year, Indian companies sold the equivalent of $44 billion in rupee-denominated bonds, up 29% from 2016.

Investors say the recent slowdown is worrying. "High bond yields may eventually lead to higher costs, endangering the tiny green shoots of growth in the economy," said Dharmesh Ojha, chief investment officer of ITI Reinsurance in Mumbai.

Going into the second half of 2017, debt investors in India were starting to get nervous about the country's widening fiscal deficit and inflationary pressures from rising commodity prices.

On Dec. 27, market sentiment soured after India's government said it would expand its annual borrowing program by 500 billion rupees ($7.7 billion) by selling more government securities in the financial year ending March 31. That represented a roughly 8.6% increase over its previous borrowing plans.

Bond prices dropped on the news, hurting Indian banks, which hold 40% of the government's outstanding securities. Many banks had to mark down the market values of their investments at year-end, and within the financial sector there was griping about why the government didn't wait for the start of the new year to make the announcement, according to traders.

Some banks have since shied away from buying more government bonds, resulting in the cancellation of two bond auctions by the Reserve Bank of India. The market got some relief in mid-January, after the government revised its figures and said it would issue just INR200 billion more in debt.

Indian bond yields are climbing when rising long-term interest rates in many parts of the world are worrying investors. In the U.S., Treasury yields have also risen following the government's decisions to reduce taxes and increase spending. The Federal Reserve has also cut back on bond purchases, concerning private investors who will be relied upon to make up the difference.

India has long relied heavily on domestic banks and investors to support its debt markets. Foreign investors hold roughly 5% of the total INR51 trillion ($786 billion) in outstanding Indian government bonds, and their ownership is capped by regulations that restrict the types of investors and the maturities of bonds they can purchase

"What really needs to get resolved is the supply and demand for government securities," said Vivek Rajpal, Asia interest-rates strategist and executive director at Nomura in Singapore. He said foreign investors, who are still attracted to India's long-term growth prospects, could help bolster demand for the country's debt.

Write to Manju Dalal at [email protected] and Debiprasad Nayak at [email protected]

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