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India's Bond Market Needs More Than Debt Switch
13 Feb
Summary
- Government bonds surrendered gains after a debt switch operation.
- Yields rose due to weak demand and significant supply concerns.
- Further support via buybacks is needed to lower bond yields.
Indian bond market participants have indicated that additional support, particularly through bond buybacks, is necessary to significantly cool yields. Government bonds recently relinquished the gains that followed a surprise debt switch operation involving 755 billion rupees.
This debt switch, a component of the government's debt management strategy, aimed to reduce repayment and borrowing needs for the upcoming fiscal year. However, concerns over a demand-supply imbalance in the bond market have driven the 10-year benchmark yield to levels last observed over a year ago.
Experts suggest that a cash surplus should be utilized for buybacks to lessen the pressure on next year's borrowing requirements. Weak investor demand and substantial government supply have contributed to rising yields, diminishing the impact of earlier monetary policy easing.
Even significant bond purchases by the central bank have not fully reassured the market. Analysts predict that heavy government borrowing could maintain pressure on long-term bond yields in the coming months, with the 10-year yield potentially reaching 6.80% by March. The spread between the 10-year bond and the policy repo rate has widened considerably, indicating a higher premium for longer-duration debt.
