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Informist, Thursday, Aug. 28, 2025

 

MUMBAI – The risks of additional government bond supply in 2025-26 (Apr-Mar) remain limited in the near term, despite fiscal concerns weighing on the market sentiment, Nomura said in a note Thursday. The brokerage maintained its forecast of no additional bond supply for the year, and recommended five-year bond swap given the recent underperformance of sovereign debt. 

 

"Many of these concerns are around supply, while these are valid for state development issuance and potential higher IGB (Indian government bond) supply in future years, we believe near term the risks are somewhat low," Nomura said. "...We think current levels are attractive, but note the weak sentiment in the market, therefore think bond swap remains a better risk reward at the current juncture." 

 

The market has been concerned about the fiscal slippages due to total 50% tariffs imposed by the US on India and due to revenue losses on account of rationalisation of goods and service taxes. While concerns over an increase in state bond supply due to the reforms in GST rates was valid, the brokerage said chances of an increase in borrowing for the fiscal year were limited. "Central government can send an additional installment of the tax devolution to the states...another in September would be quite frequent, however, it is warranted, in our view, given the higher SDL supply, which is unseasonal," the brokerage said. States' share of taxes is split into 14 payments. Payments are sent monthly, with an additional payment in two months. An additional payment was sent in June.

 

The additional 25% tariff the US placed on India for buying Russian oil could lead to the government providing fiscal support for exporters, along with even lower revenues. News that the European Union is mulling secondary sanctions to prevent countries from helping Russia circumvent restrictions may lead to persistent concerns in the market, the brokerage said.

 

In its recommendation to the Group of Ministers on rate rationalisation, the Centre has suggested doing away with the 12% and the 28% tax slabs. The Centre has proposed to bring 99% of items under the 12% tax slab to the 5% slab and almost 90% of items under the 28% tax slab to the 18% tax slab. Currently, 65% of the total GST revenue comes from items falling under the 18% tax slab and 11% revenue is collected from items under the 28% slab. Only 7% and 5% GST is collected from items under 5% and 12% tax slabs, respectively.

 

These concerns have led to a spike in Indian government bond yields, along with higher state development loan supply. Nomura said that with the recent rise in yields, bond buybacks from the government or secondary market gilt purchases through open market operations by the Reserve Bank of India were likely. Lower money market rates, open market operation auctions and adjustments to the supply calendar were also possible, it said.

 

"Timing of the intervention is hard to know; however, the (RBI) Governor (Sanjay Malhotra) noted in his June interview that transmission of policy through government securities remains equally as important as the banking channel," Nomura said.

 

If RBI's support measures are announced, the brokerage sees a scope of 20-25-basis-point fall in the 10-year benchmark gilt yield, and said it looked to add exposure in gilts maturing in 10 years. The brokerage also retained its recommendation to receive fixed rates on the two-year OIS rates due to higher rates, but with a moderate conviction level of 3/5. 

 

The brokerage also said that the RBI could take a relaxed approach and reduce the frequency of variable rate reverse repo auctions, which will allow the Weighted Average Call Rate or the overnight Mumbai Interbank Offered Rate to drift lower towards the RBI's Standing Deposit Facility of 5.25%. "From next week onwards, banking system liquidity should get a boost from the pre-announced CRR cut and the government month-end spending, these could lift banking liquidity to around INR 3.5 trillion" the brokerage said. "...This could improve the carry of owning bonds for the funded traders, and additionally would likely be an implicit signal that the RBI is open to the idea of more monetary policy easing."  End

 

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Reported by Srijita Bose

Edited by Deepshikha Bhardwaj

 

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