According to a borrowing plan issued by the Reserve Bank of India on Tuesday, the new bond will add to the 30-year and 40-year tenor paper offered, expanding the nation's yield curve.
India's growing middle class is changing the dynamics of the country's $1 trillion sovereign debt market by increasing demand for life insurance and pension funds. Prime Minister Narendra Modi's administration has been making record borrowings, and this sale would help them become less reliant on bank purchases to do so.
“Investor demand has been strong, supported by the expansion of the formal sector, with households allocating a higher share of financial savings in life insurance, pensions and provident funds,” Gaura Sen Gupta, economist at IDFC FIRST Bank wrote in a note.
Unnamed government officials told reporters that they are working to lengthen the average maturity of debt issued in the wake of India's inclusion in JPMorgan Chase & Co.'s emerging market index.
Between October and February, the government plans to sell 300 billion rupees ($3.6 billion) in the 50-year bond market, representing over 5% of its total borrowings.
Already, the yield curve has been affected by the growing influence of life insurers, who now own a fourth of government debt. Longer-term debt had lower yields than shorter-term paper earlier in the year.
This year, the yield on 30-year bonds has dropped by 11 basis points to 7.34%, exceeding the decline of 7 basis points seen in the yield on 5-year notes.
The central bank has announced that the Modi government will sell bonds totaling 6.55 trillion rupees during the second half of the fiscal year. That's right on track with the lofty annual goal of 15.43 quadrillion rupees.
Before the federal elections next year, investors were worried that the government may borrow more money to pay for greater spending.
According to a note released by Nomura Holdings Inc. after the announcement, "a reduction in capex or reliance on the small savings scheme are likely to be the first ports of call," rather than additional borrowings later.
One basis point was added to the yield on the benchmark 10-year bond, bringing it to 7.16%.
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