Signs of a recovery for India’s troubled shadow banks have taken a step backward as concerns reemerged about the true impact of the pandemic on the lenders.
Average spreads on the lenders’ AAA rated five-year bonds rose for the first time in four months in September. Of three other gauges tracking shadow bank sector health compiled by Bloomberg, two
including banking system liquidity and outstanding debt weakened, while a share performance index stayed put.
The developments are a setback after months of improvement following unprecedented central bank stimulus and targeted support for the industry, as authorities try to cushion the economy from the pandemic fallout. The shift comes after India’s top court extended the easing of rules in September over the classification of non-performing loans, increasing concern about lenders’ assets.
A robust shadow banking system is a must for India as the financiers lend to those that banks often won’t, including weaker firms. Support for the lenders is essential for Prime Minister Narendra Modi as he seeks to spur the economy, which has suffered its worst quarterly contraction on record.
The shadow bank sector could again see more improvement ahead after more support for credit markets in recent weeks. The Reserve Bank of India stepped up stimulus measures again in October, with a promise to finance 1 trillion rupees ($13.6 billion) of corporate bond purchases by banks.
Tide is turning for Indian bonds on RBI’s liquidity bonanza
India’s sovereign bonds are turning a corner as a supply overhang dissipates following a raft of liquidity measures from the central bank. Early signs of economic revival are also spurring hopes of an improvement in government
The yield on India’s benchmark 10-year bond fell about 14 basis points over the past month to 5.9%, making it Asia’s best performer, with the bulk of its decline coming in after the Reserve Bank of India announced steps including doubling the size of its bond purchases in a policy address last week.
The expectations are for the 10-year yield to drop further to 5.75%, a level last seen in July, according to a median estimate of 15 traders surveyed by Bloomberg. That’s compared to forecasts of around 6% just two weeks ago amid concern that the administration may further hike its 12 trillion rupees ($163.8 billion) bond sale target for the year.
“The RBI in one shot has cleared all the uncertainty about the heavy borrowing program and we could see bonds gaining from here on,” said Anoop Verma, senior vice president at DCB Bank Ltd. in Mumbai.
Bonds were primed for gains even before the RBI announcement as data showed a manufacturing index rise to the highest in more than eight years, while goods and services revenues improved, spurring optimism the government may not increase its borrowing target further after a 54% hike in May. The government said in late September it will leave its October to March issuance plan unchanged at 4.34 trillion rupees.
However, the RBI still faced ire from bond traders for not doing enough to shoulder the government’s unprecedented debt issuance.