Indian bonds slide as RBI says banks must manage rate risks

INDIAN SOVEREIGN BONDS and the rupee tumbled after a central bank official warned banks they can’t keep relying on the regulator to manage their interest-rate�� risks, as the rout in the debt market extended into its sixth month.

“The regular use of regulatory help isn’t desirable from the point of view of efficient price discovery in the bond market and effective market discipline,”�� Viral Acharya, deputy governor of the Reserve Bank of India, said late Monday at a meeting of traders. “Interest-rate risk of banks cannot be managed over and over again by their regulator.”

Acharya’s comments “added to the nervousness of an already jittery market,” said Vivek Rajpal, a rates strategist in Singapore at Nomura Holdings Inc. “Sentiment is already weak due to additional borrowings, uncertainty around the budget and higher oil prices,” he said.

Ten-year sovereign yields are set to advance for a sixth straight month in January, the longest streak since 2000. The yield on the new benchmark due January 2028 jumped 10 basis points to 7.38% and is up 27 basis points since it started trading on Jan. 5.

“With relatively high duration and concentration of government securities in investment portfolio, bank earnings and capital remain exposed to adverse yield moves,” Acharya said.

Government securities accounted for around 82% of commercial banks’ total investments in the fiscal year to March 2017 and around 84% for state-run banks, he said, adding the exposure “has noticeably increased since 2014.”

Lenders including State Bank of India and Central Bank of India have asked the RBI to let them spread the losses incurred on the sovereign debt in the three months ended December over two quarters, The Economic Times reported on Jan. 4.

“The market is taking it as the RBI may not be willing to go out of the way to help manage the losses,” said Vijay Sharma, executive vice president for fixed income at PNB Gilts Ltd. in New Delhi.

“Hence, it’s expected that demand for government securities may take a further beating.”

Stock prices of most state-run banks skidded while the rupee suffered its biggest loss in nearly a month, falling as much as 0.7%. The currency traded down 0.6% to 63.86 a dollar as of 12:45 p.m. in Mumbai. Shares of State Bank of India, the nation’s largest state-run lender, declined 1.2% to 298.90 rupees, while Punjab National Bank fell 1.9% and Bank of Baroda slumped 2.4%. —��Bloomberg