India bonds gain sharply on surprise cut in government borrowing

Mumbai: Indian government bonds saw the sharpest one-day gains in over four years on Tuesday following a surprise cut in the government`s borrowing programme for the fiscal year starting April.

The 10-year bond yield dropped to as much as 7.3565 percent from 7.62 percent, its lowest since Jan. 29, andmarking its biggest intraday fall since December 9, 2013.

The rupee rose to 64.77 per dollar from 64.87 on Monday.

Besides a lower than expected borrowing number, investors also cheered the government`s decision to issue securities uniformly spread across different maturities in contrast to the previous format where a large part of the issuances were concentrated in the 10-14 year tenure, traders said.

"We expect the rally to continue in the near term with the 10-14 year segment seeing bigger gains than shorter bonds given that most traders had sold off these bonds earlier and the supply will be lower than before," said a trader at a foreign bank.

India plans to borrow 2.88 trillion rupees ($44.45 billion) during April-September, the government said after market hours on Monday, adding it will borrow 500 billion rupees less for the full year 2018/19.

Indian bond markets have been reeling as state banks, the biggest investors in government debt, shy away from the market

due to huge trading losses.

Traders said the reduction in government borrowing may also suggest the central bank will be more cautious about raising interest rates in an economy which is running far below its potential.

The Reserve Bank of India will make its next monetary policy announcement on April 5 and is widely expected to keep rates on hold. Traders will look closely at the tone of the statement to gauge whether the RBI will be in a hurry to raise rates to pre-empt further inflation pressure or if it will take a wait-and-see approach.

"If one parent is trying to help, then the other parent might also do something to supplement the effort," said one analyst, referring to expectations from the RBI following the government`s borrowing announcement.