India’s bond market got a major boost this week after global financial services major JP Morgan Chase & Co. announced the inclusion of Indian government bonds in its Emerging Debt Market Bond Index. This will come into force from June 2024. The market reacted positively to the announcement, with the 10-year bonds closing the week at 7.19 per cent on Friday, higher than it was expected.
“Bond traders initially hoped the yields would touch down to 7 per cent. However, to their surprise, yields went up during the day to close at 7.19 per cent due to profit-booking from traders and banks,” says Venkatakrishnan Srinivasan, founder of Rockfort Fincap LLP, a financial advisory firm.
He adds that “Traders might have considered the current market volatility to sell the bonds due to negative factors like higher US Treasury yields, crude oil prices, the El Nino monsoon effect, etc.”
The inclusion of the Indian government bonds in JP Morgan’s Emerging Debt Market Bond Index will likely ease the supply pressure and open the gates for other bond indexes to add Indian bonds in future. Srinivasan believes besides the bond market, it will also affect positively the forex market.
Meanwhile, on Friday, the Reserve Bank of India (RBI) announced the next weekly lot of auctions of treasury bills and state development loans (SDLs). The tentative yield on three-month, six-month, and 364-day T-bills are 6.86 per cent, 7.06 per cent, and 7.07 per cent, respectively.
This time, 12 states will participate in SDL auctions: Rajasthan, Punjab, Manipur, Madhya Pradesh, Kerala, Tamil Nadu, Haryana, Gujarat, Goa, Chhattisgarh, Bihar, and West Bengal. Chhattisgarh is offering the highest interest rates at 7.46 per cent for SDLs, which matures on September 27, 2030.
Rockfort data shows the state governments are expected to sell SDLs worth Rs 27,000 crore in the auction on September 26, as against the scheduled market borrowing of Rs 26,700 crore.
On the liquidity issue, Srinivasan adds, “The system liquidity continued to be on deficit mode with RBI injecting funds into the banking system on a daily basis. In a surprise move, RBI did a 14-day VRRR auction for Rs 50,000 crore despite negative liquidity in the system, and banks did participate and parked Rs 5,995 crore despite a huge deficit. We expect the liquidity situation to ease out in the coming weeks.”
Last week saw many primary bond issuances, including those from Sundaram Finance, Axis Finance, Tata Capital Financial Services, DLF, Bajaj Finance, Godrej Properties, and State Bank of India. JP Morgan’s decision also has had a positive impact on India’s corporate bond market as its yield movement is always linked to government bond yields, says Srinivasan. For instance, SBI raised Rs 10,000 crore of infra bonds on Friday at an annualised yield of 7.49 per cent.
Muthoot Finance’s public issuance of bonds, worth Rs 700 crore launched on September 21, is expected to close on October 6 with an option to close early.
Many issuers have now lined up to launch fresh bond issuances next week to cash in the positive momentum. Issuers like Shree Cement, REC, PNB, Canara Bank, Nabard, HDFC Ergo, Tata AIG, Tata Power, ABFL, and Godrej Industries etc., are expected to tap the bond market next week.