BackStates steal thunder from India’s sovereign debt as yields surge
Demand for sovereign notes has soured amid concern the govt will struggle to meet its fiscal targets
Premium
Mumbai The widening spread between yields on bonds issued by Indian federal and state governments is threatening to jeopardize Prime Minister Narendra Modi’s borrowing programme.
Demand for sovereign notes has soured amid concern the central government will struggle to meet its fiscal targets as it prepares to unveil the federal budget on Monday for the year starting 1 April. While that’s driven yields up, the increase is smaller than for state securities, causing their average spread to expand to about 100 basis points, from around 50 basis points in the last five years, according to Tata Asset Management Co.
Twenty-one states sold debt worth Rs21,450 crore ($3.1 billion) at a 23 February offering, the most money ever raised in a single sale, according to India Ratings and Research Pvt. In comparison, underwriters have had to rescue four auctions of sovereign notes in the last two months, and the central government Wednesday failed to sell any of the treasury bills offered at a sale for the first time since July 2013.
“The spread is attracting long-term investors to state bonds and cannibalizing demand for government notes," said Soumyajit Niyogi, associate director at India Ratings, a unit of Fitch Ratings. “Rising issuance of state debt is also a factor."
Negative impact
India granted foreign investors access to state-government bonds for the first time last quarter. Investment by global funds stands at Rs4,060 crore, data from the National Securities Depository Ltd. show, against a current cap of Rs7,000 crore.
Working together, the nation’s 29 states would form a bloc that has a bigger economy than the whole of sub-Saharan Africa, more members than the European Union, and twice the population of North America. Their gross borrowings are estimated at Rs3 trillion in the current fiscal year, more than double the Rs1.2 trillion for the 12 months ended March 2010, Ritesh Jain, Mumbai-based chief investment officer at Tata Asset, wrote in a note.
Uttar Pradesh, the nation’s most populous state, sold 10- year notes at a cutoff yield of 8.83% at an auction Tuesday, according to a central bank statement.That’s up 49 basis points from 8.34% at a 12 January sale. The yield on sovereign bonds maturing in January 2026 rose two basis points to 7.85% as of 12:46pm in Mumbai on Thursday, having increased 23 basis points from 12 January.
Higher state yields have “impacted sovereign bonds negatively," said Jain of Tata Asset. “State governments have emerged as a significant source of supply" and demand for sovereign securities from some key “yield-seeking" investors such as insurance and provident funds is getting diverted to state notes, he wrote.
India’s rupee fell 0.1% to 68.6175 a dollar, prices from local banks compiled by Bloomberg show. The currency fell to as low as 68.6925 on Monday, near a record low of 68.845 seen in August 2013. 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!
