Indian govt bond supply to outstrip demand in FY24, prompt RBI action - StanChart strategist

By Siddhi Nayak and Dharamraj Dhutia

MUMBAI (Reuters) - Supply of Indian government debt in the coming fiscal year is likely to outstrip demand, pushing up bond yields and prompting the Reserve Bank of India to likely provide support via bond buys, a rates strategist at Standard Chartered Bank said.

The federal government aims to borrow a gross 15.43 trillion rupees ($186.88 billion) through the sale of bonds in fiscal 2023/24 starting in April. Net borrowing is pegged at 11.81 trillion rupees.

"Since the market believes that we are near the end of the rate-hike cycle, the issue of demand-supply mismatch is not in focus (currently)," Nagaraj Kulkarni, co-head - Asia rates strategy (ex-China), and head - flows strategy global research at StanChart told Reuters on Thursday.

Once the debt auction calendar is announced in March and the focus of the market shifts to demand-supply dynamics, markets might see upward pressure on bond yields, he said.

According to Kulkarni, the likely net bond market supply of central and state government debt of 18.8 trillion rupees could fall short of takers, despite demand from banks, insurance companies and provident funds.

The shortfall in demand - to the tune of 1 trillion rupees to 3 trillion rupees - could push up government borrowing costs as StanChart expects the RBI to step in with open market purchases of around one-to-two trillion rupees in the next fiscal, he said.

Kulkarni expects net supply from states to be around seven trillion rupees in the next fiscal. He expects the 10-year benchmark bond yield to range between 7.25% to 7.40% in the next three months, from 7.34% currently.

The RBI's Monetary Policy Committee is likely to pause after the April policy meet and shift its stance to neutral, he said, adding that rate cuts are now likely to get pushed to 2024.

The MPC hiked its key repo rate by a quarter percentage point on Feb. 8 to 6.50%, but left the door open to more tightening, saying core inflation remained high.

StanChart expects headline retail inflation to moderate to an average of 5% in FY24 from 6.7% in the current financial year, while core inflation is seen easing to an average 5.5% in FY24 from 6% in FY23.

The rupee should trade in the range of 81 to 83 per dollar for the next three months, Kulkarni said, assuming crude oil prices stay in the range of $80-$90 per barrel with RBI continuing its current practice of intervening in the spot and forward market.

($1 = 82.5650 Indian rupees)

(Reporting by Siddhi Nayak and Dharamraj Dhutia; Editing by Nivedita Bhattacharjee)