India must limit H1 bond sales to 55% of annual goal, sell more long-end debt – traders

By Siddhi Nayak and Dharamraj Dhutia

MUMBAI (Reuters) – India’s federal government should restrict borrowing in the first half of next fiscal year to 55% of the target with a higher share of longer-tenor bonds, market participants said in their discussions with the central bank last week, multiple traders said on Wednesday.

The Reserve Bank of India, which acts as the debt arranger to the government, met select banks, primary dealers and insurance companies last week for their feedback on borrowing for the first half, seven bankers and treasury officials, who declined to be named, told Reuters.

RBI did not immediately reply to a Reuters email seeking comment.

India aims to borrow gross 15.43 trillion rupees ($187.85 billion) through a sale of bonds in the next financial year beginning April 1, up from the 14.21 trillion rupees raised this year.

The government typically does around 60% of the bond sales in the first half of the year, though traders have requested that it be limited to 55% next year as October-December has huge maturities, and the haze on interest rates will also clear up.

Bonds worth 1.59 trillion rupees are due to mature in first half and 2.81 trillion rupees in second half.

“With heavy redemptions in the second half, there could be more demand during that period, and interest rate scenario will also be clear than what it could be in April-September,” a trader with a state-run bank said.

Traders said they preferred long-end papers of seven to 14 years.

“Insurance companies are anticipating good inflows and suggested that they would be comfortable with borrowing in the ultra-long end of the curve, especially in the 20–50-year bucket,” a treasury official at a large state-run bank said.

However, the central bank may not be keen on 20-year bonds as that could pose a setback to the second most liquid bond in the 14-year segment, traders said.

“The 14-year bond is currently sought after by insurers and pension funds, but if they get a 20-year option, they will move away from the 14-year segment, making it difficult to go through in auctions,” a trader with a private bank said.

Traders also suggested the government issue three-year bonds instead of two-year papers, and limited shorter-duration bond supply, conducting the auction through the multiple price method.

The government issued two-year, five-year, seven-year, 10-year, 14-year, 30-year and 40-year bonds along with floating rate papers (FRB) in the first six of months of this fiscal year.

“There is no demand for FRBs, and the government should not include them,” another trader said.

The Indian government bond yield curve is flat, and with uncertainty over the rate hike cycle, it would make sense for the government to keep issuance for up to five years limited.

($1 = 82.1400 Indian rupees)

(Reporting by Dharamraj Dhutia and Siddhi Nayak; Editing by Swati Bhat and Dhanya Ann Thoppil)