Indian bond yields climbed to a nine-month high as traders pared expectations of further interest-rate cuts and as concerns over potentially large supply of provincial debt in coming months hurt appetite.
The 10-year bond yield rose as much as eight basis points to 6.68% on Monday. The rise to the highest level since 18 March came despite a recent rate cut by the Reserve Bank of India. The selloff was exacerbated by thin trading volumes toward the year-end, traders said.
“It’s a mix of reasons there is some disappointment on interest rates after the minutes of the MPC’s latest meeting and some disappointment on the lack of further bond purchase announcements by the RBI,” says Puneet Pal, head of fixed income at PGIM Asset Management in Mumbai.
The minutes of India’s rate-setting panel’s last meeting, released after trading hours on Friday, reinforce the view that inflation is set to head up while growth remains resilient, says Gopal Tripathi, head of treasury at Jana Small Finance Bank.
The move in the yield past the 6.62% mark triggered stop-losses, he said, referring to sales carried out to minimize declines.
To be clear, the Reserve Bank of India has bought bonds worth Rs 1 trillion over the past two weeks to inject banking system liquidity.
Still, cash conditions remain tight after recent tax outflows and the Reserve Bank of India’s dollar sales in the currency market to support the rupee.
Growing concerns over a potentially large rise in state debt supply worsened sentiment further. State governments have announced bond sales worth Rs 33,220 crore ($3.7 billion) for Tuesday, higher than Rs 26,855 crore earmarked in a central bank calendar.
“There seems to be a real lack of appetite in the market—that is evident from the widening bid-ask spreads,” says VRC Reddy, head of treasury, Karur Vysya Bank.
“The higher-than-expected state bond supply and the lack of a fresh bond purchase announcement by the RBI have all contributed to this.”
Indian states typically step up bond sales in the first quarter of the calendar year when the federal government issues a smaller quantum of debt. In the coming quarter, states’ issuance could be in the range of Rs 4.5 trillion to Rs 5 trillion, says Abhishek Upadhyay, economist at ICICI Securities Primary Dealership.
That’s sharply higher than Rs 1.83 trillion they’ve issued so far this quarter.