A bond fund manager who correctly predicted that Reserve Bank of India (RBI)would introduce a United States (US) Federal Reserve style Operation Twist, said that the nation needs more foreign capital to fund its record borrowing.
India’s borrowing may rise to Rs 7.6 lakh crore for the fiscal year starting April 1, according to Suyash Choudhary, head of fixed income at IDFC Asset Management Co. “The market can only handle it if more foreign investors are allowed to participate and the central bank continues its Operation Twist, where it buys longer-maturity bonds and sells shorter-term ones,” he added.
Otherwise, the large borrowing size will be a huge cause for concern, Choudhary said, adding that the long end of the sovereign bond curve may remain volatile and the benchmark 10-year yield could rise over the 6.75 per cent mark.
The market has struggled with a record government borrowing of Rs 7.1 lakh crore this fiscal year and while the central banks unprecedented bond operation kept long-end yields in check, fears that the budget deficit may widen further has pushed up yields since November. The 10-year bond closed at 6.6 per cent on Thursday.
Overseas funds have long sought greater access to Indian debt but they hold only 3.4 per cent of the almost Rs 60 lakh crore of outstanding sovereign bonds. Choudhary suggests that the government lift a 6 per cent limit on foreign ownership.
That goes against the widely-held view among policy makers that opening up the local debt market to foreigners may leave the nation vulnerable to the swings in global capital flows. India’s plans to raise as much as $10 billion via offshore debt announced in July failed to take off amid similar concerns.
No panacea
Foreign investors may not be a panacea, they sold Rs 11,000 crore of government bonds so far in January, on track for the first sell-off since September, according to data from Clearing Corp of India.
On Thursday, the RBI raised foreign ownership limit in the country’s corporate and sovereign bonds to Rs 1.5 lakh crore for funds that commit to keeping a part of their investment in the country for at least three years. But the 6 per cent cap on sovereign debt investment was left unchanged.
Choudhary sees this as a precursor to a potential global index inclusion of India’s bonds. Last nights relaxation has to be seen in context that foreign investors have been selling Indian bonds lately, he said, adding that the market needs a push factor.
Limited tools
Policy makers may have to look for more unconventional measures to prop up an economy that’s growing at its slowest pace since 2009. After cutting rates five times last year, the RBI may be constrained to make further reductions as consumer price inflation hit its highest in more than five years in December.
Choudhary expects India to report a fiscal deficit of 3.8 per cent of the gross domestic product (GDP) for the current fiscal year, up from a government’s target of 3.3 per cent. He forecasts the budget shortfall to be about 3.5 per cent for next year.
The market needs to know that the entire supply of bonds need not be absorbed only by the domestic players, he said.