Indian Stocks Rally, Bonds Drop On $32 Billion Bank Funding Plan

Government strategy met with caution, but analysts predict a longterm currency effect

Indian sovereign bonds fell on speculation a government plan to issue special debt to recapitalise staterun lenders will crimp demand for existing notes. Equities rallied to a record and the rupee erased losses in late trade to end higher.

Prime Minister Narendra Modi’s administration will inject an unprecedented 2.11 trillion rupees ($32 billion) into the banks over two years to revive growth. The government will sell 1.35 trillion rupees of recapitalisation bonds while banks will raise another 760 billion rupees through “budgetary support” and from the market, according to announcements made last month.

“Recap bonds will likely not be part of the headline deficit, but they will add to the reduction in bond demand, especially from banks, which are the biggest holders of the securities,” said Vivek Rajpal, a rates strategist at Nomura Holdings Inc. in Singapore.