Indian bonds are sliding at the fastest pace in almost two decades, and the selloff isn’t showing signs of easing. The yield on benchmark 10-year notes, up for a fifth month in December, will rise further by end of March, according to 10 of 15 respondents in a Bloomberg survey. Some see it going from 7.25 percent on Thursday to as high as 7.50 percent, as a potentially wider fiscal deficit risks more debt sales by the government and elevated oil prices threaten to fan already-rising inflation. If that wasn’t enough, this week brought another headwind. A slim poll victory for Prime Minister Narendra Modi’s ruling Bharatiya Janata Party in his home state of Gujarat stoked speculation that his administration will resort to populist measures to woo voters ahead of the 2019 general election. “The uncertainty surrounding government borrowings is hanging like a sword over the bond market,” said Vijay Sharma, executive vice president for fixed income at PNB Gilts Ltd. in New Delhi.
“Worries about additional bond sales have heightened after the not-so convincing BJP win in Gujarat and investors want clarity on the government’s fiscal stance.” The 10-year yield will be at 7.25 percent by the end of March, according to the median estimate in a Bloomberg survey conducted earlier this week. The yield’s seven-basis point jump in just the past two days has seen it already touch that level on Thursday. It has surged 78 basis points since the end of July. DBS Bank Ltd. and Capital Economics predict the yield at 7.30 percent by end-March, with the former forecasting it to rise to as high as 8 percent in the coming quarters. India’s fiscal deficit for April to October has already reached 96.1 percent of the target for the year to March. That’s even as investors seek clarity on the impact that the government’s plan to fund state-run lenders by issuing special bonds will have on the debt market.
“The biggest concern is what the government is going to do with the budget deficit,” said Debendra Kumar Dash, a fixed-income trader at AU Small Finance Bank in Mumbai. “As long as it doesn’t clarify its stance on that, markets will remain jittery.” Data earlier this month showed consumer-price inflation accelerated to a 15-month high in November, prompting bets among swap traders that the central bank is done cutting rates and its next move is likely to be a hike. Most members in India’s monetary policy committee sounded hawkish about inflation, according to minutes of the Dec. 5-6 meeting published late Wednesday. The recent upturn in crude oil prices has emerged as a source of concern, and several uncertainties, especially on the fiscal and external fronts, persist, RBI Governor Urjit Patel was cited as having said.
The “time has come for monetary policy to take guard and be ready to go on to the front foot,” said Michael Patra, an arch hawk and one of the six MPC members. “Market participants are particularly worried about inflation surprising on the higher side,” said Dhawal Dalal, chief investment officer for debt at Edelweiss Asset Management Ltd. That happening “may push the benchmark 10-year yield higher toward 7.40 percent,” he said. With the 10-year yield up 73 basis points in 2017, benchmark sovereign bonds are set to end a three-year winning run, during which the yield slipped 231 basis points, as the Reserve Bank of India reduced benchmark rates to the lowest since 2010.
“Inflation, current account and fiscal dynamics are likely past their best phase and set to deteriorate,” said Eugene Leow, a Singapore-based fixed-income strategist at DBS Bank. “Overall, risks are building on the horizon, muddied by the rise in commodity prices.”