Modi’s avoidance of extra debt relieves ‘scared’ bond investors

Prime Minister Narendra Modi has kept the Indian government debt in line with the budgeted estimates, easing the country’s market after enduring months of declines.

In the financial year starting April 1. 2020, Modi’s administration will borrow about $109 billion, in line with estimates verified by Bloomberg. Government bond sales this year would be maintained at $99.45 billion, putting to end fears of the state taking on as much as $7 billion in new debt.

According to the vice president for fixed-income at PNB Gilts Ltd Vijay Sharma: “The market was scared before the budget, but no negative surprise has come our way.”

Benchmark yields could drop 5 to 7 basis points “with this event out of the way without doing much harm”, Sharma added.

Additionally, the Indian government’s decision to open up some bonds to foreign ownership, a likely forerunner to Indian debt being listed on global indexes, is a welcomed move by investors. The 10-year benchmark yields rose by 15 basis points following fears of excessive borrowing by the state to try and revitalise the economy.

The maximum allowable debt shareholding by foreign investors will also be increased from the current 9% to 15%.

The head of fixed income at Mirae Asset Global Investments Co. in Mumbai Mahendra Jajoo commented saying: “We could see a positive mood in the bond market in the short term.”

In the long term, the bond market may need to rely on the open market debt purchase of the central bank for support.

From mid-December last year, the Indian Reserve Bank has been involved in the buying and selling long and short term debts respectively to boost lending while pulling down spreads.

Last Friday saw the country’s 10-year yields jump four basis points to 6.6% as benchmark bonds capped three months of reductions.

The Indian government is keen on improving the ease of foreign investment in state bonds by creating a special window for passive foreign investors. Such investors would preferably have a keen eye on index investing, a government official stated. According to the official, Modi seeks to counter the effect of hot money inflows from active funds.

The official sought to remain anonymous as the timelines regarding the incoming changes remain scanty.