Indian banks seizing bonds in hopes of government support

A support for the bond market is vital for India's record borrowing plan.

Domestic banks in India are snatching up bonds, raising their holdings of sovereign notes to $555b (INR41.4t) in the hopes that the central bank will bolster the market, reports Bloomberg.

Surplus cash in the banking system has allowed banks to assume control at a time when global funds have been net sellers for four straight months. A steady support for bonds is important for the success of India’s record borrowing plan as its budget deficit is set to balloon.

“There’s liquidity overhang because deposit rates have remained largely stable and there’s no credit demand,” said Anoop Verma, senior vice president at DCB Bank in Mumbai, adding that the rupee’s 4.8% slide has slashed the “carry trade” appeal of Indian debt.

The returns for foreigners after adding hedging costs are slim, even before considering funding expenses. For local lenders with excess liquidity and poor demand for loans, sovereign bonds are the best bet.

Here’s more from Bloomberg.