Indian bonds dropped sharply on Monday after the government raised its borrowing target by more than half, citing the damage to the country’s public finances from the coronavirus crisis.
The yield on the country’s 10-year government bonds rose more than 0.2 percentage points in early trading on Monday — equivalent to the biggest daily jump in three years — to a high of 6.24 per cent. Yields rise when prices fall. The bonds later regained some ground to trade at a yield of 6.17 per cent.
The stumble followed Friday’s announcement that India’s government planned to borrow Rs12tn ($158bn) in the current financial year, which started in April, compared with its previous target of Rs7.8tn. The finance ministry said the revision was “necessitated on account of the Covid-19 pandemic”.
Bond prices fell as investors anticipated the extra debt supply. “The question the market is asking is how you fund this borrowing,” said Abhishek Goenka, founder of advisory firm IFA Global.
Many expect India’s central bank to buy up some of the extra debt in the secondary market, or even to buy directly from the government. The Reserve Bank of India bought Rs300bn of sovereign bonds in March alone as part of its open-market operations.
India has been in lockdown since late March in a bid to stem the spread of Covid-19, a move that has hurt financial markets and is expected to take a heavy economic toll. Analysts say a drop in tax revenue, combined with a need for stimulus to revive economic growth, is likely to necessitate yet more borrowing.
The fiscal deficit is expected to widen to about 5.5 per cent of gross domestic product this year, according to analyst estimates, up from the 3.5 per cent expected before the virus hit.
Suyash Choudhary, head of fixed income at finance group IDFC’s asset management arm, said in a note that the extra borrowing was likely to be at the lower end of what was needed.
“This is the biggest growth shock to the global economy in multiple decades and the size of fiscal financing embedded in such a scenario can only be financed by the central bank,” Mr Choudhary said. “We expect the Reserve Bank of India to reveal its hand soon enough to support the financing of the deficit.”
Analysts raised concerns that rating agencies would react adversely to the fiscal slippage. Indian stocks opened higher on Monday, buoyed in part by the prospect of economic stimulus, before turning lower as shares in a number banks fell. The Bombay Stock Exchange’s benchmark Sensex index closed down 0.3 per cent. It is down more than a fifth this year.