India to conduct debt switch in market, likely soon-officials

MUMBAI/NEW DELHI Mon Dec 9, 2013 5:07am EST

The Reserve Bank of India (RBI) seal is pictured on a gate outside the RBI headquarters in Mumbai October 29, 2013. REUTERS/Danish Siddiqui

The Reserve Bank of India (RBI) seal is pictured on a gate outside the RBI headquarters in Mumbai October 29, 2013.

Credit: Reuters/Danish Siddiqui

MUMBAI/NEW DELHI (Reuters) - India's planned 500 billion rupee ($8.2 billion) debt switch program will be done through the bond market and not through the central bank, two officials with direct knowledge of the country's plans said on Monday.

One of the officials said the debt switch will happen "very soon," while another said it will be done at "an appropriate time" in the second half of the fiscal year ending in March, depending on market conditions.

The plan to conduct the debt switch in markets is expected to pressure government bonds, since it would involve India buying short-dated debt maturing in fiscal years 2014/15, 2015/16 and 2016/17, but in turn selling longer-dated bonds to markets in a bid to spread out redemptions.

The new benchmark 10-year bond slumped after the news, with the yield rising as much as 8 basis points to 8.91 percent from levels before the Reuters report.

Traders had hoped the central bank would buy or sell the debt directly with the government, easing pressure on markets, but officials said that option was ruled out.

India first unveiled its debt switch plan in its fiscal budget unveiled earlier this year but had not yet given details about how it would be carried out.

"The debt switchover has been planned for the second half of the current fiscal year and would surely go through the market and not the RBI," said the official, who declined to be identified because of the sensitivity of the issue.

The debt switch is meant to ease pressure from upcoming redemptions on the country's finances. India's persistently wide fiscal deficit has been a key constraint in the country's sovereign ratings and a key worry for bond investors.

Standard & Poor's has a "negative" outlook on its "BBB-minus" rating for India, meaning any downgrade could send the country's debt to so-called "junk" status.

Redemptions will total 1.68 trillion rupees in 2014/15, 1.99 trillion rupees in 2015/16 and 2.31 trillion rupees in 2016/17.

Plans to conduct the debt switch in markets would deliver the latest blow to bond investors, with yields already surging this year as worries the Federal Reserve would withdraw its monetary stimulus sparking heavy foreign selling.

Yields have also soared since the Reserve Bank of India raised interest rates in September and in October for a total of 50 basis points to tackle stubbornly high inflation.

Traders fear the central bank could tighten monetary policy again at its policy review on December 18.

(Editing by Rafael Nam & Kim Coghill)