Indian bonds gain on cut in government’s borrowing; short-term relief ahead

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Published: March 27, 2018 12:01:49 PM

Indian bonds witnessed the sharpest gain in four years after the government announced lesser borrowing in the first half of the fiscal year 2018-19 and introduced short-term securities.

India's bond market under pressureIndia’s bond market to remain under pressure after temporary relief: DBS. (Image: PTI)

Indian bonds witnessed the sharpest gain in four years after the government announced lesser borrowing in the first half of the fiscal year 2018-19 and introduced short-term securities. The benchmark 10-year bond yield dropped to as much as 7.3565 % from 7.62 %, its lowest since January 29, and marking its biggest intraday fall since December 9, 2013, Reuters reported. Economists also believe that lower borrowing will bring short-term relief in the bond market.  

“The developments would provide some respite to domestic bonds after a combination of weak macro numbers, adverse demand-supply dynamics and higher US rates pushed 10Y yields from 6.5% in August 2017 to 7.7% earlier this month,” Singapore-based DBS said in a note.

The government on Monday said that it will borrow Rs 2.88 lakh crore in the first half of FY19 and will introduce 1-4 bonds for the first time effective April. However, DBS said, the relief will be short-term. “We are sceptical that the tinkering of the borrowing schedule (kicking the can down the road) would have a lasting impact on bonds. Yields might find support beyond a fall in the near-term,” DBS added.

It said that there are two areas of concern for Indian bond market despite short-term relief. Firstly, borrowings were front-loaded in the past to ensure limited crowding-out impact, as credit growth is usually off to a slower start in the first half of FY19; second, supply will now get bunched up in the second half, at a time when the fiscal run-rate typically turns adverse.

With the temporary cheer in the bond market, traders will be watching the first Reserve Bank of India (RBI) (RBI) monetary policy meeting of FY19 closely. With inflation showing a downward trend in last three months, experts are hoping that the central bank will keep the repo rate unchanged for the fourth time.

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