Oversupply of India bonds will drive rates up to 8%: StanChart

22 Jun 2022 , 09:19 AM

This fiscal year, the lender predicts an excess supply of sovereign and state debt of up to 6.3 trillion rupees ($81 billion). According to Parul Mittal Sinha, head of India financial markets at the bank, this is expected to further agitate a market that is already struggling to cope with rising interest rates and shrinking excess liquidity.

“It may become increasingly more difficult for supply to be absorbed by the market,” said Sinha, who has worked in the currency and rate markets in London, Singapore, and Mumbai for more than a decade. “Supply concerns will raise to start in July, and with interest rates on a rising trajectory and liquidity surpluses shrinking, all three variables might collide.”

Despite the global debt selloff, rupee bonds have remained relatively stable, with recent auctions garnering strong demand as the central bank pledged to guarantee the government’s borrowing program is completed in a timely manner. Even still, as benchmark 10-year rates climbed to their highest level since 2019 last week, there are indicators that the calm may be disturbed.

This fiscal year, the Indian government plans to sell a record 14.3 trillion rupees in bonds as it increases expenditure to encourage growth as tax cuts erode revenue. To make matters worse, the central bank is poised to raise rates again after raising them by 90 basis points in the last two sessions, while also mopping up surplus liquidity to keep prices within the target zone.

According to a June 8 report from StanChart, surplus bond supply might amount to between 3.8 trillion and 6.3 trillion rupees this fiscal year.

All of these factors have contributed to a six-month decrease in benchmark 10-year debt, with Citigroup Inc. analysts predicting that rates might rise as high as 8% from their current level of 7.48 percent. In 2018, they were at an all-time high of 8%.

Flattening of Bears

According to Sinha, the yield curve will continue to flatten, with shorter yields rising faster than long rates.

“The five-year section of the curve will continue under pressure as additional rises are implemented,” Sinha added. “The long end of the demand curve is expanding at a decent clip – demand from insurance is well-anchored in the 15- to 30-year section of the curve.”

According to Sinha, local investors who had spare cash have invested part of it after rates increased to their highest level in over three years. She went on to say that the RBI was unlikely to carry out another large bond purchase program as it did last fiscal year when it purchased 2.2 trillion rupees in debt.

“We are not in the camp that believes the RBI would do large bond purchases,” Sinha added. “You won’t need to perform that type of intervention anyways if inflation cools down and major rate rises don’t happen.”