BackRaghuram Rajan rate cut fails to lower bond yields as debt auctions flop
Indian sovereign bonds offered the worst returns among the largest emerging markets this quarter
Premium
Mumbai: Reserve Bank of India (RBI) governor Raghuram Rajan’s spell over the Indian bond market is fading as yields rise after his latest interest rate cut and underwriters step in to rescue debt auctions.
Since the RBI governor announced the quarter percentage-point reduction on 2 June, the yield on the benchmark sovereign notes due 2024 surged 29 basis points to a six-month high of 8.11% on 12 June and the three-year yield rose 17 basis points. Primary dealers rescued sales of government bonds by purchasing unsold debt three times in the last five weeks.
Indian sovereign bonds offered the worst returns among the largest emerging markets this quarter amid cautious comments from Rajan, a global debt-market rout and a forecast of inadequate monsoon rains. Borrowing costs for 10-year AAA company debt have surged to 8.58%, making them reluctant to raise money for expansion projects sought by Prime Minister Narendra Modi.
“If the government is still borrowing at around 8% after 75 basis points cut, where is the transmission?" asked Gopikrishnan MS, head of foreign exchange, rates and credit for South Asia at Standard Chartered Plc in Mumbai. “Yields are moving higher as sentiment has been battered, mainly coming from RBI policy guidance and the selloff in global bonds."
Rajan cut the repurchase rate this month for the third time in 2015 to 7.25% and linked further easing to the strength of the June-September monsoons, which are forecast to be below average for a second year and threaten to hurt crop output and stoke food costs. He flagged deficient rains, rising oil and external volatility as risks to India’s inflation.
Debt auctions
The Modi government aims to borrow a gross ₹ 6 trillion in the year ending March 2016. Underwriters had to buy ₹ 1,266 crore of notes that went unsold at last Friday’s auction to raise ₹ 15,000 crore. That’s after they stepped in to acquire ₹ 8,89 crore of bonds at a 5 June sale and ₹ 2,709 crore of securities at a 15 May offering. Those auctions were for ₹ 16,000 crore each.
A sale of treasury bills failed in May for the first time since February on speculation that the central bank rejected bids as too high. Investors are demanding higher rates as price pressures are seen worsening also amid this quarter’s 16% climb in Brent crude that raises import costs for India. A global rout in sovereign bonds has made matters worse.
“All these factors impact not just the government’s financing needs but also have a bearing on corporate funding," said Rajeev Radhakrishnan, Mumbai-based head of fixed income at SBI Funds Management Pvt., a unit of India’s largest lender. “They are keeping markets uncertain and we’re not seeing too much of traders’ interest or participation at these levels."
Consumer prices
Consumer prices rose 5.01% in May from a year earlier, after a 4.87% increase in April, official data showed on Friday. It would “trend up to RBI’s target of 6% by early 2016, leaving no space for rate cuts for the rest of the year," HSBC Holdings Plc economists wrote in a report on Tuesday, adding that monsoon rains “hold the key to future inflation trajectory".
The yield on the 2024 bonds rose one basis point on Tuesday to 8.08%. That on the sovereign notes due May 2025, the new 10-year debt issued last month, climbed two basis points to 7.88%, taking its advance in June to 24 basis points. The rupee has weakened 0.7% in June, on course for a fourth straight month of declines.
Bond risk
Bond risk in India is climbing. Credit-default swaps insuring the notes of State Bank of India, a proxy for the sovereign, against non-payment for five years rose to 165 basis points on 9 June, the highest since February, according to data provider CMA. They were at 164 on 15 June.
Investors in Indian government notes lost 0.8% this quarter compared with returns of 7.1% in Russia, 1.4% in China and 0.7% in Brazil securities, JPMorgan Chase and Co. indexes show.
“The external environment is in a risk-averse mode following the sharp rise in German and US bond yields, weighing on flows and India’s rupee by extension," Radhika Rao, an economist at DBS Bank Ltd in Singapore, wrote in a research report released 5 June. “Domestically, concern over a weak monsoon has also depressed sentiments." Bloomberg
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
