The risk of record borrowings is turning Indian bond investors skeptical going into the government’s budget on Wednesday, just as foreign funds exit the market at the fastest pace since 2013.
Primary dealers have rescued two of the last four sovereign-debt auctions, as Prime Minister Narendra Modi’s administration is expected to announce an unprecedented 6.25 trillion rupees ($92 billion) in gross market borrowings to fund the fiscal deficit, a survey conducted by Bloomberg shows.
With India’s monetary-easing cycle seen nearing its end and global yields rising, rupee bonds notes are seen losing appeal, and analysts expect 2017’s gain in benchmark 10-year notes to be the smallest in four years. Global holdings of rupee-denominated government and corporate notes are set for a fourth straight monthly decline, having fallen 392 billion rupees since Sept. 30.
“There is the possibility of foreign outflows continuing and not too many are betting on more than one India rate cut,” said Harihar Krishnamoorthy, Mumbai-based treasurer at the local unit of South African lender FirstRand Ltd.
Finance Minister Arun Jaitley will target a budget shortfall of 3.3 percent of gross domestic product for the year ending March 2018, according to the median estimate in a Bloomberg survey of 13 economists. That’s wider than the 3 percent goal set earlier, though lower than the 3.5 percent estimated for the current financial year. Net borrowing, excluding redemptions, is forecast at 4.3 trillion rupees, as against 4.1 trillion rupees this fiscal year.
Modi is seen boosting expenditure to offset the damage inflicted by his shock recall of high-value currency notes in November, done to combat corruption, which had crimped spending as residents rushed to deposit money at banks.
For the bond markets, “there are headwinds including how the deficit numbers will pan out,” said Killol Pandya, Mumbai-based head of fixed income at Peerless Funds Management Co., which oversees 9.7 billion rupees. “State bond sales are another big uncertainty for the markets.”
Local state government are expected to increase debt sales to cope with a loss of revenue on account of the currency ban. IDFC Bank Ltd. predicts such borrowings to rise about 20 percent year-on-year to 4.37 trillion rupees.
India’s benchmark 10-year yield dropped 125 basis points last year, its third straight annual slide and the biggest in eight years. The yield, at 6.52 percent on Dec. 31 and 6.39 percent on Tuesday, is seen ending 2017 at 6.43 percent, according to the median estimate in a January survey. Kotak Mahindra Bank Ltd. projects a range of 6.20 percent to 6.60 percent in the 12 months through March 2018.
“Bond yields are expected to head higher,” said Prasanna Ananthasubramanian, Mumbai-based chief economist at ICICI Securities Primary Dealership Ltd. “The backdrop is negative for bonds as the rate-easing cycle is coming to an end and the interest-rate differential with the US has narrowed substantially.’’
India’s 10-year bonds offer 393 basis points more than similar-maturity US rates, near the lowest in about seven years, and down from as high as 616 basis points last year.