Modi govt’s $10 billion external borrowing plan lights up market

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Updated: July 8, 2019 6:57:25 PM

Bonds rallied on Friday after the government surprised traders by trimming its fiscal deficit target to 3.3% of gross domestic product from 3.4% projected in February.

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Sovereign bonds in India extended the best weekly advance since May after a government official said that the nation could raise as much as $10 billion offshore, a move which may help shift a chunk of the borrowing away from the domestic market. “In terms of risk management I don’t see it exceeding 10-15% of the total borrowing, which makes it roughly about $10 billion,” Economic Affairs Secretary Subhash Garg said in an interview on Saturday. There’s huge appetite overseas for Indian debt, he said.

Bonds rallied on Friday after the government surprised traders by trimming its fiscal deficit target to 3.3% of gross domestic product from 3.4% projected in February, and by announcing plans to tap the offshore debt markets for the first time. Investors have been concerned about Prime Minister Narendra Modi’s plans to borrow a record 7.1 trillion rupees locally this fiscal year.“There was some confusion on the quantum of the USD borrowing,” said Naveen Singh, head of fixed-income trading at ICICI Securities Primary Dealership in Mumbai. “The figure being close to $10 billion may potentially reduce fiscal second-half borrowing.” The yield on the benchmark 10-year bond declined 12 basis points to 6.58% on Monday, extending Friday’s five-basis point drop. Yields have slid more than 70 basis points since the end of April. The rupee slid 0.5% against the dollar.

Indonesia, which has the same Baa2 rating from Moody’s Investors Service as India, priced a 10-year bond at 3.45% last month. State Bank of India — a proxy for the government in the debt markets — sold a 5-year note at a 185 basis-point yield premium earlier this year.

With about a quarter of global debt having a negative yield, investors are expected to lap up an offering from a high-yielding emerging market sovereign like India at a time when the nation’s central bank is also reducing borrowing costs.

“This rally is set to last for a while,” said R.K. Gurumurthy, head of treasury at Lakshmi Vilas Bank in Mumbai. “We may soon start discussing the probability of another rate cut in the August monetary policy committee.”

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