Reserve Bank's silence on record India bond sales leaves traders baffled

The Reserve Bank of India’s monetary policy review has come and gone but it’s done little to calm traders’ nerves over an unprecedented government bond supply.

Their patience is running thin as the RBI refrained from taking steps to ease the market’s debt burden at a policy review last week, even as the government plans to sell Rs 12 trillion ($160 billion) of bonds this fiscal year.

“The big question for the market is how this massive borrowing is going to be facilitated when banks are already full to the limit,” said Naveen Singh, head of fixed-income trading at ICICI Securities Primary Dealership Ltd. in Mumbai. “If the RBI doesn’t intervene, we could see yields resetting upwards at every auction,” he said.

The market has so far been able to withstand the heavy government debt supply thanks to the central bank’s 115 basis points rate cuts this year and its 1.2 trillion rupees of bond purchases from the secondary market since April. Banks seeking to deploy excess cash amid tepid credit growth have also boosted their sovereign note holdings.

However, with just about a third of the planned bond sales completed so far, and a growing risk of a further increase in government borrowing as the coronavirus pandemic rages on, investors are seeking a roadmap from the RBI on how it would manage the remaining supply.

The yield on the India’s benchmark 10-year bond has stayed around 5.80 per cent since mid-May after falling by more than 70 basis points this year.

“Absence of any clarity or support from the RBI may have the potential to reverse the recent decline in bond yields,” said Dhawal Dalal, Mumbai-based chief investment officer for fixed income at Edelweiss Asset Management Ltd.

Investors will be weighing two key economic data this week after the RBI indicated that it wanted to see how earlier rate cuts are working as some economic activity resumes.

July inflation due Wednesday is forecast to rise to 6.30 per cent, above the central bank’s 2-6 per cent target range, which could impede further easing. Industrial production on Tuesday is also expected to provide cues on recovery prospects as the economy heads for its first full-year contraction in more than four decades.