Traders have doubts about India's bond rally as banks remain net sellers

India’s bonds have roared back from a seven-month selloff. But traders looking for signs of the rally sustaining may have to wait longer.

State-run lenders, the biggest holders of sovereign debt, remained net sellers in five of the past seven days despite the rebound, taking the average daily withdrawals so far this year to Rs 7.1 billion ($111 million), data from the Clearing Corp. of India show.

Benchmark yield approached a four-month low last week after the central bank lowered its inflation forecast, adding to bullish triggers that have included a truncated fiscal first-half borrowing plan and a breather in the provisioning of debt losses for banks. The central bank late Friday also gave foreigners greater access to the sovereign bond market, a move that had been widely expected.

“If state banks remain net sellers day after day, then, obviously, the market can’t run on lower yields,” Vijay Sharma, executive vice president for fixed-income at PNB Gilts Ltd., said from New Delhi. “It is critical that they return.”

State lenders have sold a net Rs 164.6 billion of debt between March 27 -- the day after the government revised its borrowing plan -- and April 9, the data show.

The sustainability of the rally also depends on the government’s debt sales for the second half. That might be one reason why state banks, which already hold more securities than the statutory minimum, aren’t bullish yet.

“First-half information is all good and we’re enjoying the party, but once we’ve had our fill, we’ll start getting worried about the second half,” said Killol Pandya, head of fixed income at Essel Finance AMC Ltd. “Banks may not be aggressively buying.”

Debt Auctions

The success of the upcoming government auctions also hinges on demand from state banks. The central bank has had to cut several bond sales and scrap others in December and early this year as the debt-market selloff deepened.

At the first weekly auction of the new fiscal year, the government accepted only four bids of the 135 received for sale of Rs 30 billion of the 2028 notes, data released by the central bank Friday show. The administration accepted only one bid each for 2051 and 2033 bonds.

“One will only get a better sense of what the new bond-trading range is when one sees how the first few auctions get taken,” said Suyash Choudhary, head of fixed income at IDFC Asset Management Co.

Some investors doubt the central bank’s decision to lower its inflation forecast, saying the move was perhaps guided by efforts to keep a lid on yields. The raising in foreign ownership limit -- by 0.5 percentage points to 5.5 per cent this fiscal year and to 6 percent in the next -- is also smaller than what the market had been expecting, according to ICRA Ltd.

“We remain a bit surprised on the flip-flop of the RBI on its overall inflation projections,” said Arvind Chari, head of fixed income and alternatives at Quantum Advisors Pvt. “We do have a feeling that ‘dovishness/softness’ in the statements and tone could well have been brought about by the need to manage yields and maintain the positive sentiment.”

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