India’s $1.3 trillion debt market faces unique challenges. As governments buy back bonds and reduce borrowing, investors are not getting enough sovereign debt, resulting in a supply shortage.
The government bought back about 245 billion rupees ($2.9 billion) worth of banknotes on Thursday. This follows a Rs 400 billion cut in Treasury bill issuance last month. The Reserve Bank of India also suspended secondary market sales of bonds last week for the first time since July. The shortage comes just as Indian bonds have emerged as top performers among major Asian economies due to their recent inclusion in global bond indexes. Demand is expected to further increase as the RBI pivots to a neutral monetary policy stance, setting the stage for possible rate cuts.
“The RBI’s change in stance will add fuel to the fire as bond markets will start pricing in a 50-75 basis point rate cut from December,” said Sagar Shah, head of domestic markets at RBL Bank. “This will be the first time in 2024 that demand for government bonds exceeded supply.”
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Barclays estimates the addition of FTSE Russell this week could attract up to $9 billion. This is in addition to the more than $18 billion that has come in since JPMorgan Chase announced in September 2023 that it would add India to its major emerging market index. In last week’s bond auction, investors bid nearly three times what the government offered.
India has cut its borrowings for the fiscal year ending March 2025 as it aims to reduce its budget deficit. India’s short-term borrowing rates are on a downward trend as the Indian government curbs borrowing through Treasury bills. “We’ve spent years thinking about who’s going to buy Indian bonds and where the demand is going to come from,” said interest rate strategist Nathan Srivarasundaram. Nomura Holdings Inc. “We’re worried there’s not enough supply right now.” Eric Loh, Asian fixed income portfolio manager at Manulife Life Insurance Co., Ltd. “This was the most high-conviction transaction for our company.” Investment management in Hong Kong. “Increased demand should theoretically lead to lower repricing of the Treasury yield curve,” he said.
