RBI buys and sells bonds worth Rs 10,000 cr in third open market operation

Long-term bond yields have come down by 20 bps since first OMO last month.

The Reserve Bank of India (RBI) on Monday conducted its third special open market operation (OMO) where it sold medium-to-longer tenure bonds and bought bonds maturing in this year to correct the yield spread.

The cut-off yield for the de-facto 10-year bond (9-year now) came at 6.54 per cent, three basis points lower than the market close on the paper. The central bank bought three papers maturing between 2024 and 2029. The total amount offered by the participants were Rs 64,505 crore for a purchase plan of Rs 10,000 crore.

Unlike the past two OMOs, the central bank sold its full quota of Rs 10,000 crore in short-term bonds.

The long-term bond yields have come down by about 20 basis points since the first OMO was announced last month. The idea is to bring down long-term yields, so that transmission happens and possibly help the government borrow at a cheaper rate.

But the drop in yields have also helped some investors to get out of their bond portfolio as the scope for future rate cuts seem limited for the central bank. But foreign portfolio investors remained fairly bullish on government bonds, indicated by them using up 74.08 per cent of their allotted limits for such bonds.

Meanwhile, the central bank also conducted a 70-day cash management bill (CMB) auction, in which it moped out Rs 30,000 crore of liquidity from the banking system. The CMBs are issued to meet temporary cash need of the government, and is also an effective tool for removing liquidity.

The banking system liquidity had crossed Rs 4 trillion on bond redemption and government spending.

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S&P ratings sees debt downgrade for India if economic slide continues

Sovereign bonds slid after the report, with the yield on the benchmark 10-year note rising 5 basis points to 6.76 per cent.

India may have its debt downgraded in the event of a major economic slowdown, S&P Global Ratings said.

Sovereign bonds slid after the report, with the yield on the benchmark 10-year note rising 5 basis points to 6.76 per cent.

The rating company said it expects the economy to gradually recover over the next few years with correspondingly higher growth.

”If this recovery does not materialize, and it becomes clear that India’s structural growth has significantly deteriorated, we could lower the rating,” Andrew Wood, a Singapore-based analyst at S&P, said in the statement.

Economic growth is at the lowest since Prime Minister Narendra Modi came to power for the first time in 2014. The economy expanded 4.5 per cent in July-September, slowing for a sixth straight quarter as fall in local consumption, troubled banks and a weak global outlook took their toll.

S&P rates India at BBB-, which is the lowest investment-grade rating. Moody’s Investors Service downgraded India’s outlook to negative from stable in November though it rates the country a notch higher than S&P.

Read our full coverage on S&P

Bond traders on edge over possible stimulus; seek assurance on fiscal goals

The government will make every effort to ensure that the revenue loss from its latest booster won't affect its goal to narrow the fiscal gap to 3.3 per cent of GDP.

Business Standard : India’s drip-feed approach to reviving growth from a six-year low is doing little to lift the pall over the nation’s bond market.

Bond yields have risen in five of the past seven weeks as traders continue to fear that the government, which has avoided big-bang spending, may still resort to big giveaways. And this week’s oil shock has had investors looking for assurances that the administration will stick to a goal of narrowing its fiscal deficit.

“The mood is cautious and has been exacerbated by what happened in the oil market,” said Vijay Sharma, executive vice president for fixed-income at PNB Gilts Ltd. in New Delhi. “Any hint the deficit is going out of control will take the air out of the market.”

Benchmark yields jumped the most in 16 months in August. Flip-flops over the government’s plans for a $10 billion overseas debt sale added to the pain as the issuance was meant to shift part of a record Rs 7.1 lakh crore of planned borrowings abroad.

“Investors aren’t willing to enhance bets unless there are clear commitments on the fiscal deficit and sovereign bond issuance,” Sharma said.

The government will make every effort to ensure that the revenue loss from its latest booster won’t affect its goal to narrow the fiscal gap to 3.3 per cent of GDP, Finance Minister Nirmala Sitharaman said Saturday while unveiling the third set of measures in four weeks.

She has refrained from announcing large new spending, and has instead given export incentives, tax breaks and eased foreign investment rules in sectors including retail and coal mining.

Still, yields climbed 10 basis points to 6.73 per cent over two days as the surge in oil following the weekend’s strike against Saudi’s oil facilities renewed worries about fiscal deficit. Bonds rose for a second day, with the yield falling 3 basis points at 10:28 a.m. in Mumbai, as oil held its drop from the dramatic spike.

With risk appetite all but exhausted, the government’s fiscal second-half borrowing plan due before month-end will be scrutinized for clues on whether its budget targets would be met.

“The underlying point is that total borrowings -- center, states and state-run companies -- are pretty much exhausting all the resources available locally,” said Suyash Choudhary, head of fixed income at IDFC Asset Management Co. “Market’s risk appetite is tired at this point.”

Bad news for India's bond mkt: Global funds see pain ahead on fiscal woes

Next trigger for bonds will come from the central bank's policy decision on Thursday, when it is expected to change its stance to neutral while keeping rates on hold.

Prime Minister Narendra Modi’s record $100 billion borrowing plan isn’t the only piece of bad news for India’s bond market, some money managers say.

Debt sales could still fail to bridge a forecast deficit as the government’s budget relies on ambitious revenue collections and one-off items that may not materialize, according to OppenheimerFunds Inc. And Europe’s largest asset manager, Amundi SA, says bonds of other Asian nations offer better value.

Modi on Friday handed out $13 billion of measures including payouts for farmers and relief for taxpayers to boost support before elections, moves that will end up widening deficits. That’s bad news for the market that has slumped in five of the past six weeks as foreigners sold 43.6 billion rupees of sovereign debt in January, after paring holdings by 179 billion rupees in 2018.

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“I suspect the slippage, in reality, would be far worse,” said Krishna Memani, head of fixed income at OppenheimerFunds. “It is an election budget and the government has concluded that higher rates is a cost it is willing to bear.”

The yield on the most-traded 2028 bonds surged 13 basis points on Friday -- the most since May -- after the budget documents showed widening in the deficit targets for this fiscal year and the next to 3.4 per cent of gross domestic product. The government had earlier targeted 3.3 per cent for this year and 3.1 per cent for 2019-2020.

“I will observe closely the developments in the next few months on the budget side before I consider increasing Indian local bonds,” said Esther Law, senior investment manager for emerging market debt at Amundi. There’s more value in other Asian markets with better fundamentals and valuations relative to rupee bonds, she said.

Next trigger for bonds will come from the central bank’s policy decision on Thursday, when it is expected to change its stance to neutral while keeping rates on hold. A dovish signal will help the market take a bit of fiscal slippage in its stride, according to BNP Paribas Asset Management.

“Given a dovish central bank and only slightly deteriorating fiscal situation, we expect a slightly negative impact on yields initially,” said Jean-Charles Sambor, deputy head of emerging-market debt at BNP. “Longer term, we think that the bad news is priced in.”

While global funds were net buyers of government debt on budget day, fiscal slippage and political uncertainty mean Indian bonds will compete with other developing markets that have lower economic and political risks, OppenheimerFunds’ Memani said.

“If the Indian government is looking to foreign investors to finance its deficit, there is nothing in the budget that gets them more comfortable,” he said.