May 9, 2021

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COVID-19 crisis: Lockdowns exacerbate India’s financial woes

The unfolding Covid crisis in India is raising expectations that the government will need to raise more money for stimulus even as the outbreak worsens from its finances.
Image Credit: PTI

Mumbai: India’s Covid crisis raises expectations that Prime Minister Narendra Modi’s government will need to raise more funds for stimulus even as the outbreak worsens from its finances.

States and cities across the country, including the capital New Delhi and its financial hub Mumbai, have implemented closures or curfews, which have been seen to affect public revenues. This comes as the authorities are falling behind their current funding target by 188 billion rupees ($ 2.5 billion) just one month after the new fiscal year, according to Bloomberg calculations based on official data.

The Moody administration defaulted on its financing plans after auctions in April failed to raise the amount they targeted. Sensing the government’s growing need for funds, merchants are seeking higher returns, with the central bank forced to cancel sales or increase purchases if it refuses to join.

More funding is needed

“The fear is that domestic shutdowns could trigger a slowdown that could be offset by a financial expansion, as more borrowing is pushing longer yields higher,” said Vikas Goel, CEO and Managing Director at PNB Gilts Ltd. He said the 10-year yield rises to 6.35% in the next two to three months.

The standoff represents the latest battle to dominate the bond market in India, after the central bank earlier rejected traders’ demands for higher returns when selling benchmark bonds. Insurers were forced to bail out the sale of five-year bonds on April 9 and the central bank failed to meet its target of offering last week.

Friday’s debt auction may provide a clue of how the conflict is going. The Reserve Bank of India is set to offer 260 billion rupees of bonds, including 140 billion rupees of 10-year benchmark bonds. After trading Thursday, the Reserve Bank of India said it would buy 100 billion rupees in bonds as part of Operation Twist on May 6.

The yield on the benchmark 10-year bond fell two basis points to 6.04% on Friday, and fell 13 basis points this month, the largest number since October.

Much of the market’s concerns center around the government’s plan to borrow around 12.1 trillion rupees this year. At the moment, there are no indications that the government intends to increase this amount although Finance Minister Nirmala Sitraman said last week that she would not hesitate to initial download loans if the need arises.

India is now the global hotspot for the epidemic, with infections exceeding 18 million cases, while deaths exceeding 200,000. The government has come under increasing pressure as beds run out of hospitals, oxygen and medical supplies in many parts of the country.

Inflation problems

Traders are also trying to assess whether the new lockdowns and restrictions will disrupt the flow of goods and lead to higher prices. While the central bank has pledged to maintain its accommodative policies, it has warned that failure to contain the second wave could disrupt domestic supply chains and fuel inflationary pressures.

F. Lakshmanan, Treasurer, Federal Bank Ltd. “The question is how to implement the massive borrowing program.” “Investor interest has increased dramatically in the short term, while the stated intention of new issues is to move in the long term from a government perspective. Moreover, there is a lot of focus on the reference paper.”