Indian Bonds Tumble Most in Five Weeks on Record Debt Sale Plan

Feb. 16 (Bloomberg) -- India’s bonds tumbled the most in five weeks after the government said it will borrow record amounts this fiscal year and the next as it boosts spending to revive economic growth.

Yields on debt due in 2018 climbed to an almost one-week high as India said it plans to sell 2.61 trillion rupees ($53.5 billion) of debt, or 80 percent more than its initial target, in the year ending March 31. The borrowing target for the next fiscal year is 3.62 trillion rupees, according to the government’s interim budget unveiled today.

“People are dumping bonds because debt sales in the pipeline are the biggest yet,” said Arvind Sampath, head of interest-rate trading at Standard Chartered Plc in Mumbai. “Yields are rising as supply is set to overwhelm demand.”

The yield on the 8.24 percent note due April 2018 rose 25 basis points to 6.42 percent at the 5:30 p.m. in Mumbai, according to the central bank’s trading system. That is the steepest increase since Jan. 9. The price fell 1.89 rupees per 100-rupee face amount to 112.47. A basis point is 0.01 percentage point.

The yield on the note has climbed 1.57 percentage points from a record low of 4.85 percent reached last month.

Prime Minister Manmohan Singh’s government is borrowing more to fund two stimulus packages it unveiled in the past two months to revive Asia’s third-largest economy. Growth may slow to 7.1 percent in the year to March 31, 2009, the weakest in six years, according to government estimates. Foreign Minister Pranab Mukherjee, while presenting the budget, said spending to revive the economy is more important now than worrying about the deficit.

Market ‘Spooked’

“What spooked the bond market was the statement that next year’s fiscal deficit estimates are based on current numbers,” said K. Ramanathan, who helps manage 25 billion rupees at ING Investment Management in Mumbai. “The concern is that the government will have to spend more to protect the economy and growth with more stimulus measures. The deficit could be higher.”

India will release as much as 480 billion rupees into the financial system in the coming financial year by repaying bonds previously sold under the so-called market stabilization plan, according to the finance ministry. The government sells debt under the stabilization plan to prevent excess cash at banks from fanning inflation. The government repaid 817.8 billion rupees of stabilization debt in the current fiscal year.

Bonds pared losses after India said it will turn to sources outside the bond market to raise as much as 450 billion rupees of the additional borrowings planned for the current fiscal year. The government didn’t give details.

The cost of five-year swaps, or derivative contracts used to guard against rate fluctuations, climbed. The rate, a fixed payment made to receive floating rates, rose to 4.88 percent from 4.70 percent on Feb. 13