(Bloomberg) — India’s government bond market is set to oversupply and push benchmark yields to 8% by the end of the year, according to Standard Chartered plc.
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The lender estimates that the additional supply of sovereign and state debt could total 6.3 trillion rupees ($81 billion) this fiscal year. This is likely to further upset a market that is struggling to cope with rising interest rates and dwindling surplus liquidity, said Parul Mittal Sinha, head of India’s financial markets at the bank.
Sinha, who has spent more than a decade trading currencies and rates in London, Singapore and Mumbai, said “it could become increasingly more difficult for the market to absorb supply.” “Supply concerns will increase from July onwards and with interest rates normalizing on a higher trajectory and liquidity surplus reducing – all three factors can come together.”
Rupee bonds have maintained a semblance of stability amid a sell-off in global debt, with good demand in recent auctions as the central bank vowed to systematically ramp up the government’s lending programme. Still, there are signs that there may be a breach of the peace after the benchmark 10-yield hit its highest level since 2019 last week.
Indian officials are trying to sell bonds worth a record Rs 14.3 trillion this fiscal year as they spur spending to spur growth while tax cuts slash public revenues. To make matters worse, the central bank is expected to hike rates further after rising 90 basis points in the last two meetings, while also removing excess liquidity to keep prices running above its target band. Is.
According to a June 8 note, Stanchart estimates that the additional bond supply this fiscal could be between Rs 3.8 trillion and Rs 6.3 trillion.
All of these downsides have fueled a six-month slump in the benchmark 10-year loan, and analysts at Citigroup Inc. forecast that yields could now rise to about 7.42% to 8%. They last reached 8% in 2018.
According to Sinha, the yield curve is likely to continue to decline, with short yields rising faster than longer rates.
“As more and more increases, the five-year portion of the curve will remain under pressure,” Sinha said. “Long-term demand is growing at a good pace — the 15- to 30-year portion of the curve aligns well with demand from insurance companies.”
Sinha said that local investors who were sitting on surplus cash have put in some funds, which have reached the highest level in three years. He said the RBI was unlikely to execute another major bond buying program like in the last fiscal, when it bought loans worth Rs 2.2 trillion.
“We are not in the camp that expects RBI to buy any major bonds,” Sinha said. “If inflation calms down and there aren’t big rate hikes, you won’t need that kind of intervention anyway.”
(Updates on bond yields in paragraph 7)
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