COVID-19 crisis: Lockdowns worsen India’s fiscal woes

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

States and cities in the country, including New Delhi Rajdhani and its financial center Mumbai, have implemented lockdowns or curfews, which appear to affect public revenue. Based on official figures, according to Bloomberg’s calculations, executives are lagging their current financing target of 188 billion ($ 2.5 billion) in the new financial year in just one month.

Traders are also trying to assess whether new lockdowns and restrictions will disrupt the flow of goods and drive up prices. While the central bank has promised to keep policy adjustments, it has warned that failure to contain the second wave could disrupt domestic supply chains and fuel inflation pressures.

After the auction in April, Modi’s administration has lagged behind its financial plans, as it failed to achieve as much targeted. Given the government’s increasing need for funds, traders hold out for higher yields, forcing the central bank to cancel sales or promote purchases if it refuses to accept.

Need for more funding

“The fear is that localized lockdowns may result in a slowdown which may be met by fiscal expansion, and more borrowing pushing longer yields higher,” said Vikas Goel, chief executive and managing director at PNB Gilts Ltd. India’s curve is likely to steepen with the 10-year yield climbing to 6.35% in the next two to three months, he said.

“The fear is that localized lockdowns may result in a slowdown which may be met by fiscal expansion, and more borrowing pushing longer yields higher,” said Vikas Goel, chief executive and managing director at PNB Gilts Ltd. India’s curve is likely to steepen with the 10-year yield climbing to 6.35% in the next two to three months, he said.

A debt auction on Friday may provide a clue as to how the tussle will play out. The RBI is scheduled to offer 260 billion rupees of bonds, including 140 billion rupees of benchmark 10-year notes. Post trading Thursday, the RBI said it will buy 100 billion rupees of bonds as part of its Operation Twist on May 6. The yield on benchmark 10-year bond fell two basis points to 6.04% on Friday, and is down 13 basis points this month, the most since October. Much of the market’s worries center around the government’s plan to borrow a near-record 12.1 trillion rupees this year. For now, there are no signs the government intends to increase that amount although Finance Minister Nirmala Sitharaman said last week she won’t hesitate to front load borrowings if the need arises. India is now the global hotspot for the pandemic, with infections climbing above 18 million cases, while deaths have exceeded 200,000. The government has come under increasing pressure as hospitals run out of beds, oxygen and medical supplies in many parts of the country.