Asia's worst bond market has more to fear: Modi's borrowings

By Kartik Goyal

The timing for India to sell an estimated record amount of debt couldn’t be worse.

Prime Minister Narendra Modi’s government will seek to borrow 6.5 trillion rupees ($102 billion) in the fiscal year starting April 1, according to the median estimate of 15 fixed-income strategists and economists before Thursday’s budget. That compares with the 6.05 trillion rupees expected for the current year.


Whereas falling oil prices and bond yields have benefited Modi since he took power in 2014, their steep ascent in the past six months is posing a threat. Chief Economic Adviser Arvind Subramanian cautioned Monday that the government can’t rule out a pause in its plan for fiscal consolidation, helping extend a rout that has made Indian sovereign notes Asia’s worst performers.

“Setting overly ambitious targets for consolidation -- especially in a pre-election year -- based on optimistic forecasts that carry a high risk of not being realized will not garner credibility," Subramanian said in the Economic Survey presented in Parliament.

The benchmark 10-year bond yield climbed following his comments and was up 4 basis points at 7.35 percent Monday. It surged 81 basis points last year in its biggest annual jump since 2009 and may climb to as high as 8 percent in the next fiscal year, a level last seen in 2014, ICICI Securities Primary Dealership Ltd. has estimated.

“As the oil-price windfall that the government reaped starts to wither away, the challenges to fiscal consolidation would increase,” Prasanna Ananthasubramanian, chief economist at ICICI Securities, said prior to the Economic Survey’s release. “The outlook for government bonds is not good given the huge supply of debt and risks from elevated oil prices, above-target inflation and hardening global yields. The selloff is likely to sustain.”

Faster inflation spurring expectations that the Reserve Bank of India will tighten rates, and concerns over a wider deficit have soured bond-market sentiment. The median estimate of analysts surveyed expect a fiscal 2019 budget deficit of 3.2 percent, wider than the 3 percent the government has targeted.

Brent prices have gained almost 60 percent since its June low, and have been trading above $70 a barrel. The higher oil prices threaten to add to India’s inflationary pressures and weigh on its finances given the nation imports about three-quarters of its needs.

“The biggest concern for the market is the huge size of the government’s borrowing when demand is already very weak,” said Vijay Sharma, executive vice president for fixed-income at PNB Gilts Ltd. in New Delhi. “To stabilize the markets, fresh demand for securities has to be generated by raising limits for foreigners or the RBI buying bonds.”

Net market borrowings for the 12 months starting April are seen at 4.6 trillion rupees, compared with 4.05 trillion rupees expected this year, according to the survey.

Other comments on the outlook for Indian bonds:

Nirmal Bang Equities Pvt Ltd. ( Teresa John, Mumbai-based economist)

• Recovery in bank credit growth will reduce the demand for securities from lenders. Incremental flow from foreign investors in FY19 will also be subdued compared with FY18, as foreign holding limits are almost fully utilized
• Supply of government bonds is likely to exceed normal demand, which implies that the pressure on yields will sustain

ICRA Ltd., Moody’s local unit ( Aditi Nayar, an economist)

• “A deviation from the fiscal-consolidation path would dent the credibility of the government’s commitment to reducing its fiscal deficit”
• Moreover, it may further harden bond yields and bloat the government’s interest payments, and prevent higher outlays toward other sectors in coming years
• Expects budget deficit in a range of 3.2%-3.5% of GDP in FY19

HSBC Holdings Plc ( Himanshu Malik, a Singapore-based strategist)

• “India’s hard-won macro stability has yielded substantial economic gains. A deficit wider than 3.2% can erode more than it has to offer, becoming an adversary to inflation, rates, and debt sustainability”
• Upward pressure on bond yields to persist near term especially with the backdrop of rising inflation