Indian bonds market is all set to hit by a supply glut, which may drive benchmark yields toward 8 per cent by the year-end, according to a report by Standard Chartered Plc.
Excess supply of sovereign and state debt may total as much as Rs 6.3 trillion ($81 billion) this fiscal year, it said, adding that’s likely to further upset a market that’s struggling to cope with rising interest rates and dwindling surplus liquidity, said Parul Mittal Sinha, head of India financial markets at the bank.
“It may keep becoming incrementally more difficult for supply to be absorbed by the market,” said Sinha, who has spent more than a decade trading currencies and rates in London, Singapore and Mumbai. “Supply worries will increase from July and with interest rates normalizing to a higher trajectory and liquidity surplus de-creasing –- all these three factors can come together.”
Rupee bonds have maintained a semblance of stability amid the selloff in global debt, with recent auctions drawing decent demand as the central bank vowed to ensure the orderly completion of the government’s borrowing program. Still, there are signs that the calm may be shattered after benchmark 10-yields soared to the highest since 2019 last week.
Indian authorities are looking to sell a record Rs 14.3 trillion of bonds this fiscal year as they boost spending to spur growth while tax cuts erode public revenue. To make matters worse, the central bank is expected to hike rates further after 90 basis points of increases in the last two meetings while also mopping up excess liquidity to tame prices that are running above its target band.
StanChart estimates that excess bond supply may total between Rs 3.8 trillion to Rs 6.3 trillion this fiscal year, according to a June 8 note.
All these negatives have fueled a six-month drop in benchmark 10-year debt, and analysts at Citigroup Inc. are among those who predict that yields may climb as high as 8 per cent from around 7.48 per cent now. They last reached 8 per cent in 2018.
