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Moody’s India ratings: Bond market gets nervous after change in outlook

Bhavik Nair
Moody's India ratings, Bond market, Bond yields, RBI, global bond index

Bond yields moved higher on Friday, with the old benchmark yield closing at a six-week high of 6.75% after Moody's changed the outlook on India government’s ratings to 'negative' from 'stable'. The yield on the new benchmark bonds - 6.45% yielding government securities maturing in 2029 - closed 5 basis points higher at 6.56%, hitting the highest level since they were launched in October this year.

Dealers indicated Friday's news added to the negative sentiment in the bond market that is already reeling under fiscal deficit fears, excess supply of papers, and a lack of positive triggers. "With the change in outlook, the market has definitely become nervous," a dealer said.

MS Gopikrishnan, an independent market expert, said by changing the outlook to negative, the rating agency is indicating that it is closely monitoring the situation, and going forward the risk of it downgrading India does exist.

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"The two big negatives looming over the bond market are the risks of downgrade as well as persistent oversupply. There is so much of excess supply of bonds in the market that despite many rate cuts, there has been very little rally in bond prices. The central government is pushing a bulk of its borrowing off its balance-sheet to that of public sector enterprises. On a net basis, the market is awash with supply and that is not helping the yields," he said.

It is noteworthy that bond yields did not soften despite multiple rate cuts by the Reserve Bank of India in recent times. A few months back, market participants had hoped the central bank would conduct open market operations (OMO) purchases as they had expected a fall in system liquidity with the approach of the festive season. An OMO purchase of securities by the RBI reduces the supply of papers in the system, thereby bringing the yields lower under usual circumstances.

However, the system liquidity remained in excess even during the festive season that eventually diminished the chances of any OMO actions by the RBI. The other factor that could have pushed the yields downwards was the potential issuance of an overseas sovereign bond. However, the idea was put on the back burner, with many experts expressing their skepticism on the same. Market participants say although chances of an overseas sovereign bond issuance remain slim, hope still exists in other forms.

"I think the one positive step that could materialise in near future is (that) government bonds getting added to a global bond index," Gopikrishnan said. With the change in outlook by Moody’s, it would be interesting to note how foreign portfolio investors (FPIs) react. FPIs have bought $626.90 million worth of Indian bonds since the beginning of November and remain net buyers of Indian debt in 2019 at $10.85 billion, according to Bloomberg data.