India bonds drop as fiscal fears intensify, debt supply hurts

Indian government bonds fell in early trade on Friday, led by the benchmark, as fiscal slippage fears deepened and traders braced for heavy supply at the weekly debt auction.

The benchmark 10-year bond yield stood at 6.5439% as of 9:45 a.m. IST, near this week's high of 6.5486% and up from Thursday's close of 6.5278%. Yields move inversely to prices.

New Delhi will sell 360 billion rupees ($4.12 billion) of bonds, including 300 billion rupees of the benchmark, taking its outstanding to 1.8 trillion rupees.


"It seems demand may be weak for the benchmark paper, but it will go through, as there would be investor interest at these levels," trader with a state-run bank said.

Bond market sentiment weakened on fears of fiscal slippage after Prime Minister Narendra Modi unveiled sweeping goods and services tax reforms last week.

India plans to slash the levy by October and has proposed a move to a two-rate structure of 5% and 18%, scrapping the 12% and 28% rates in place currently, a top official said last week.

The government has not quantified the loss to the exchequer from these changes, while a panel of ministers on Thursday endorsed the new rate structure, stoking more concern.

Traders also await commentary from Federal Reserve Chair Jerome Powell later in the day for cues on interest rate trajectory.

RATES

India's overnight index swap rates witness marginal uptick in thing trading, while traders await comments from Powell.

The one-year OIS rate was not yet traded after ending at 5.52%, while the two-year OIS rate had ended at 5.4850% in the previous session.

The liquid five-year OIS was marginally higher at 5.7350%. ($1 = 87.3500 Indian rupees).