Overseas Bond Listing, Evergrande Fallout To Push India Yields Lower -- Analysts
Friday,
24-Sep-2021
09:43 AM (IST)
The listing of India’s sovereign bonds on global indices and the fallout from China Evergrande Group’s debt crisis should help lower yields that have remained stubbornly high despite several rate cuts and massive debt purchases by the central bank, analysts said. The Reserve Bank of India cut the key policy rate to a record low 4% between March and May last year to help the economy cope with the impact of the pandemic. The RBI also infused hefty liquidity into the banking system and launched an unprecedented bond buying programme. Still, India’s 10-year bond yield has stayed firm at 6.14% as New Delhi’s borrowings hit record highs to make up for the dent in revenues due to the pandemic. India’s yield movement compares with a 20-basis-point fall in the U.S. 10-year Treasury yield to 1.44% and a 55-basis-point slide in the Indonesian rate to 6.27%. New Delhi aims to lower the fiscal deficit to 6.8% of the gross domestic product in this fiscal year from 9.3% last year despite a near record market borrowing of 12.06 trillion rupees ($163.3 billion). An upswing in economic activities after a delta-variant fueled wave of the pandemic has boosted revenues. This could ensure that India’s borrowing target is met but India’s net debt stock should stay elevated at around 90% of the GDP. India’s central bank has promised to hold the key policy rate to sustain the economic recovery despite inflation breaching the 4% target for several months and a rate-setting panel member asking for the reverse repo rate to be raised from 3.35%. Higher overseas inflows will ensure that Indian bond yields rise only marginally over the next year-and-a-half even in an environment of higher U.S. Treasury yields, according to Capital Economics. The U.S. Federal Reserve has signaled it would likely announce the start of the scaling back of bond purchases in the November meeting. Meanwhile, the ongoing liquidity crisis at cash-strapped property developer China Evergrande Group could prompt foreign fund outflows, some of which could also be redirected to India, analysts said. News that the highly-leveraged real estate developer could miss its debt repayments roiled financial markets over the last week, with investors spooked about wider financial sector stress. The Chinese developer’s debt crisis is reminiscent of India’s IL&FS debt crisis. In 2018, India’s top infrastructure financier defaulted on a series of debt payments and New Delhi had to step in to calm the financial markets. Indian regulators have since streamlined the corporate bond market, making it more transparent. India’s economy saw its worst-ever contraction of 7.3% last financial year after months-long stringent lockdowns while China posted a growth of 2.3% in 2020. New Delhi reported a record 20.1% annual upswing in GDP growth in April-June while China’s economic expansion was at 7.9%. Foreign investors have net sold Indian debt worth $673 million so far in 2021, but have pumped in net $3.61 billion via the so-called voluntary retention route, according to data from the National Securities Depository. This is a significant improvement over last year’s $14.06 billion net sale of bonds, while net investments through the VRR route were at $3.39 billion.
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