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India bond traders expect government to raise second-half debt sales by a fifth

New Delhi

INDIAN bond traders' worst fears may be realised this week if Prime Minister Narendra Modi's government announces a further increase to its mammoth borrowing plan.

Traders expect the government to lift its borrowing estimate for the October-March period to six trillion rupees (S$112 billion) from the existing five trillion rupees, according to 10 out of 16 traders in a Bloomberg survey. The timing for this increase couldn't be worse as the Reserve Bank of India is set to keep its policy rates on hold on Thursday amid persistently high inflation.

"With no rate cut baked in, the only thing the market is waiting for is the borrowing calendar, and cues in the RBI policy," said Lakshmi Iyer, chief investment officer debt at Mumbai-based Kotak Mahindra Asset Management Co. "Additional borrowings will definitely spook the market if there isn't a game plan to support extra sales."

The additional borrowing could take full-year issuance to a new high of 13 trillion rupees from the current target of 12 trillion rupees, according to Bloomberg calculations. The RBI and the Finance Ministry are likely to announce the second-half borrowing calendar on Wednesday, officials with knowledge of the matter said.

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But that's not all. Additional supply from cash-strapped state governments is set to add to the market's debt burden. ICICI Securities Primary Dealership expects states to sell more than six trillion rupees of debt in the second half, double the amount from the preceding six months.

Strains on the bond market are becoming evident amid the supply glut, with underwriters having to step in to rescue four of the past seven debt auctions.

The benchmark 10-year bond yields are also inching up. It had dropped from a four-month high touched in August after the RBI bought bonds outright on top of conducting a Federal Reserve-style twist, wherein it simultaneously buys long-term securities and sells short-term ones.

So far the RBI has used these measures sporadically to deal with yield spikes, but Bank of America sees it holding US$75 billion of open-market bond operations by March to ensure smooth auctions. Expectations are for the RBI to keep the benchmark yield anchored below 6 per cent, seven out of 12 traders in a separate survey said.

The 10-year yield rose three basis points to 6.07 per cent on Monday after climbing by five points on Friday.

However, increasing bond sales may not be the only option for the government, according to some traders. Funds needed to stimulate the economy amid its worst contraction can also come from Treasury bill sales, according to AU Small Finance Bank. "Unprecedented times call for unprecedented solutions," said Deben-dra Dash, who doesn't rule out a Bank Indonesia-style direct debt monetisation by the RBI.

The government may also delay the potential increase in supply to shield the market from an immediate shock. Six out of the 16 traders surveyed see the issuance hike coming towards the latter part of the fiscal year, when the officials have a better visibility of revenues, while six others expect no change. BLOOMBERG

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