Record Sales to Make India’s Unlikely Bond Rally Short-Lived

(Bloomberg) — A relief rally driving India’s sovereign bonds could end in a few weeks.

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Canceled auctions and a dovish central bank decision drove benchmark yields down by more than 20 basis points in the past two weeks. Half of that will unwind just before the start of India’s record borrowing plan in April, according to a Bloomberg survey of 12 analysts and traders.

By the end of the year, 10-year yields could jump to a 2019 high as the government pushes through with an ambitious plan to sell some 15 trillion rupees ($200 billion) of debt, the survey indicates. And while the Reserve Bank of India has held back from raising interest rates, it’s also unlikely to return to the pandemic-era measures of bond purchases.

“Indian bonds find themselves uncomfortably clutched between a large borrowing program and the reassurance of a delayed monetary policy normalization,” said Churchil Bhatt, executive vice president at Kotak Mahindra Life Insurance Co. “Going forward, we expect policy normalization to be underwhelming and more or less predictable. So, demand & supply and not monetary policy is expected to be the key market mover.”

Yields on the 10-year bonds could climb to 6.75% by the end of the first quarter, and 7.23% by the end of December, the survey showed. They rose three basis points to 6.72% on Tuesday amid a surge in crude prices and RBI going ahead with an auction this week after canceling previous two sales.

While Reserve Bank of India Governor Shaktikanta Das said this month that the central bank, which also doubles as the government’s debt manager, will focus on completing the borrowing plan, he didn’t offer specific support measures for the bond market.

Given that the RBI has started winding back excess liquidity, it probably won’t return to buying bonds in the market anytime soon. Last year, it bought 2.2 trillion rupees of debt before calling an end to its bond-purchase program in October.

Concerns about higher inflation with crude oil prices over $90 a barrel also raise questions over when the RBI would have to start raising rates.

If the central bank does reverse course, the market could do with some 4-5 trillion rupees of purchase support in the next fiscal year, according to Kotak Mahindra Bank Ltd.

“Bond yields are expected to head higher over the coming quarters, unless RBI shores up demand with a substantial amount of purchases,” said Badrish Kulhalli, head of fixed income at HDFC Life Insurance Ltd.

(Updates yields in the fifth paragraph)

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