India bond gains capped by smaller than expected RBI dividend

MUMBAI: An advance in Indian government bonds was restrained on Friday by traders paring bullish positions after a lower-than-expected surplus transfer from the Reserve Bank of India to the government brought fiscal concerns to the fore.

The benchmark 6.48% 2035 bond yield settled at 7.0917%, bouncing off the day’s low of 7.0636%, but still 2.2 basis points below Thursday’s close. The yield rose 3 bps on the week after sharp swings in recent sessions. Bond prices move inversely to yields.

The Reserve Bank of India approved the transfer of 2.87 trillion rupees ($29.99 billion) as surplus to the federal government, it said in a statement on Friday. The surplus transfer is bigger than last year’s record 2.69 trillion rupees, but below market expectations.

Iran’s blockade of the Strait of Hormuz has thrown global energy supply into disarray, especially for countries such as India, which imports 90% of its oil requirements. Nearly one third of that usually comes through the strait, and disruptions to crude, natural gas as well as other key commodity supplies are set to weigh on India’s economy.

“There is risk of a large fiscal slippage, so the government is in need of additional revenue sources,” said A Prasanna, chief economist at ICICI Securities Primary Dealership.

The median forecast from a Reuters poll of economists pegged India’s fiscal deficit at 4.7% of gross domestic product this fiscal year, with some saying it could go as high as 5%, compared to last year’s 4.4% and the government’s 4.3% target.

MUFG has called for RBI policy rate hikes of 25 bps each in June and August, following a similar projection by Standard Chartered.

The RBI, however, does not see interest rate hikes as the best way to defend the embattled rupee, reinforcing that inflation - not the currency - will guide policy on borrowing costs, Reuters reported, citing sources.

Rates

India’s overnight index swap rates eased as traders received fixed rates after heavy paying in the previous session on rate-hike concerns.

The one-year swap ended 5.5 bps lower at 6.30%, while the two-year rate fell 3.5 bps to 6.52%. The five-year rate fell 2.75 bps to 6.8150%.