India’s bonds drop drives banks away

SBI, PNB and BoB banks are reluctant to add to those holdings amid deepening treasury losses


MUMBAIHow have the mighty fallen. A year ago, foreign funds including Franklin Templeton Investments were piling into Indian bonds. A record-long slump has now prompted the nation’s biggest bank to say enough is enough.

India’s 10-year bonds dropped for a seventh month in February, the longest-losing streak in data compiled by Bloomberg starting in November 1998. Government-run lenders such as State Bank of India (SBI), Punjab National Bank (PNB) and Bank of Baroda (BoB), are the biggest holders of the securities and have been net sellers as a group this year.

“With yields moving continuously higher, there’s little incentive left for banks to buy for trading purposes,” said C Venkat Nageswar, head of treasury and deputy MD at the SBI in Mumbai. “Even the liquidity situation has worsened. So, there are no reasons for banks to buy any significant amounts.”

The state-owned banks, who hold more than 80% of their investments in India’s bonds, are reluctant to add to those holdings amid deepening treasury losses. They are keeping away amid a vicious cocktail of quickening inflation, near-record government borrowing, the prospect of higher interest rates, and rising yields around the world.

India’s benchmark 10-year yield surged to 7.82% last week, the highest since February 2016. It may reach 8% in the fiscal year starting April 1, ICICI Securities Primary Dealership Ltd said in January. The yield rose five basis points yesterday to 7.77%.

India’s economy expanded 7.2% in the three months through December, the fastest in five quarters, the government said on Wednesday. That compares to the 7% forecast in a Bloomberg survey. Analysts are predicting faster growth will add to inflation and put pressure on the central bank to increase interest rates.

“GDP (gross domestic product) data is negative for rates markets as it brings forward rate-hike expectations.” said Vivek Rajpal, a rates strategist at Nomura Holdings Inc in Singapore. “That said, sensitivity to rate-hike expectations is largely tied up with inflation.”

Bond trading volumes declined to an average 290 billion rupees (RM17.27 billion) a day in the first two months of this year, from 435 billion rupees in the same period in 2017, according to central bank data.

“At this moment, it’s tough to see much positives for the market,” Nageswar said. “We need some positive steps for market sentiment to improve. Otherwise, we may continue to see a demand-supply gap.”

Nageswar said actions the authorities could take to revive the market include raising investment limits for overseas investors, reducing the rupee’s volatility, or increasing the required amount of bonds that banks need to hold.

SBI has been trying to reduce duration and has been limiting purchases except for short-term trading, Nageswar said.

Most state-run banks already hold about 10 percentage points more government debt than they are required to under the statutory norms, he said. SBI posted its first quarterly loss in 17 years in the three months through Dec 31, partly due to a decline in treasury income.

Nageswar expects 10-year yields to range between 7.55 and 7.7% through the end of March, compared to his November prediction of 6.5%. — Bloomberg