India’s finance ministry will raise its concerns about the sharp rise in market bond yields when it holds a meeting this week with the central bank to discuss government borrowing plans for the year, two people familiar with the matter said.
A persistent rise in bond yields has raised worries among senior government officials about a potential increase in overall interest rates in the economy.
India’s spike in yields comes as worldwide concerns about inflation and rising interest rates knocked investor confidence, with global stocks tumbling on Tuesday after a Wall Street rout.
“The fundamentals of the market do not command such high yields,” said one of the people. “The rise in yields will eventually push up interest rates in general in the economy.”
Separately Economic Affairs Secretary Subhash Chandra Garg told financial newsprovider Newsrise that the government might cancel the upcoming auction on Friday if yields remained high.
India’s benchmark 10-year bond yield fell six basis points to 7.53 percent after the news on hopes the government and RBI might consider steps to ease yields.
The meeting, the first in a series of debt management talks with the Reserve Bank of India scheduled over the next one month, will discuss the timing, tenure and tools of government financing over the next financial year, the people said.
The government will also raise the possibility of the RBI buying bonds via open market operations (OMOs) to keep yields lower and inject liquidity, one of the people said, though the final decision on whether it does so rests with the central bank.
Both the RBI and finance ministry did not have an immediate comment on the planned discussions.
Indian government bond yields have risen by 110 basis points since July and are on track to post a third straight quarter of increase, marking the sharpest rise since the 2013 currency crisis, due to worries about a hawkish RBI, fiscal slippage and high inflation.
That has forced the government to cancel some of its bond auctions including its last scheduled one for 110 billion rupees ($1.71 billion).
“We wanted to send a message to the market that we are not comfortable with the high yields. That is why we cancelled the auctions,” said the second person, adding the government won’t seek to borrow the amount it would have raised at last week’s cancelled auction as it was comfortable with its cash position.
“We are trying to give as much relief as possible. Even the gross borrowing number was not high,” the person said.
In the fiscal 2018-19 budget outlined last week, India’s government announced planned gross market borrowings of 6.06 trillion rupees ($94.34 billion), in line with market expectations.
Attention is now turning to the RBI’s monetary policy outcome on Wednesday, with the RBI expected to toughen its rhetoric around inflation and lay the ground for a rate hike, as recent data has shown a marked acceleration in inflation within the economy.
Anindya Das Gupta, managing director and head of trading at Barclays India, said the RBI’s comment about its inflation stance this week will be an important cue for markets.
“If state banks stay away from buying and the RBI tone is hawkish, then we’re headed for higher yields in bond markets,” Das Gupta said.moneycontrol