India: Key Auction Looms for RBI as Traders Balk at India Yields

  • Barely weeks into India’s new borrowing program, the nation’s sovereign bond traders and the central bank are shaping up for a third bruising battle.
  • The Reserve Bank of India’s explicit assurance to buy INR1tr (USD13bn) of bonds in 1Q21 has failed to encourage more purchases by traders. Underwriters were forced to rescue a five-year bond sale on 9 Apr 21 and the RBI cancelled an offering altogether on 16 Apr 21 when traders demanded higher yields for benchmark 10-year debt.
  • An auction of INR320bn of bonds on 23 Apr 21 will show if the central bank can begin bending traders to its will, or whether the market could lose confidence entirely in its recent move toward quantitative easing.
  • At stake is a near-record INR12.1tr government borrowing plan for this fiscal year that is key to helping the country combat a new wave of Covid-19 infections.
  • Soaring infections have compelled India’s financial and political capitals to impose movement curbs that can cripple economic activity. That has added to concerns about the need for greater fiscal stimulus, which in turn could push borrowing even higher.
  • The market will be watching to see if underwriters are leaned on again and the RBI accepts more than the scheduled amount, according to B. Prasanna, head of global markets, sales, trading and research at ICICI Bank Ltd.
  • “This could be quite bad for risk appetite going forward and lead to investors keeping away from bond auctions, fearing secondary market selling from primary dealers at distress levels,” he said.
  • While the RBI isn’t alone in its tussle with bond traders, it is trying to contain inflation while many of its peers are striving to spur prices higher. Governor Shaktikanta Das has also added moral suasion to his policy tool kit, repeatedly urging traders to treat the bond yield curve as a “public good” because of its impact on borrowing costs in the broader economy.
  • Das has provided the market with a clearer roadmap for the next few months but traders want more clarity on how purchases of at least INR3tr will play out over the full fiscal year.
  • They continue to demand higher yields, citing domestic inflation pressures and the global reflation trade, and some have adopted strategies that present new challenges for policy makers.

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