No relief for India bond market as RBI is seen tightening money tap

Mumbai

INDIA'S central bank is seen curtailing its support for the bond market, dashing hopes of relief for investors reeling under two straight months of declines.

The Reserve Bank of India may buy 1.7 trillion rupees (S$33.4 billion) of debt in the year starting April 1, according to a Bloomberg News survey of traders and economists. That compares with an estimated record three trillion rupees spent on such purchases this fiscal period.

Tightening the spigot on purchases is bad news for a market already jittery about the heavy supply of paper from Prime Minister Narendra Modi's record US$100 billion borrowing plan. The yield on new 10-year debt may climb as high as 7.75 per cent over the coming months, according to ICICI Securities Primary Dealership Ltd, a level last seen in November.

"If the OMOs go out of the picture at a time when we have humongous debt supply hitting the system, we may see bond losses intensifying," said Naveen Singh, head of fixed income trading at ICICI Securities.

In a sign of things to come, the Reserve Bank of India on Feb 26 unveiled purchases for the first two weeks of March after earlier saying it would extend support for the entire month. The central bank may halt fresh buying in the quarter starting in April as higher spending by the government is likely to boost liquidity in the banking system, Mr Singh said.

The purchases, aimed primarily at addressing the cash crunch in the banking system, have helped absorb a little over half the sovereign bond supply of 5.71 trillion rupees this fiscal year. The support may taper because of an improvement in liquidity, and HSBC Holdings Inc expects the RBI to cut back buying to between 1.8 trillion rupees and two trillion rupees. BLOOMBERG