Traders in the embattled Indian sovereign bond market finally have something to cheer.

Prime Minister Narendra Modi ’s government in a surprise move announced it would auction just 48 per cent of its planned annual bond sales in the first six months of the financial year starting April 1. That’s less than the 60 per cent to 65 per cent it typically raised in previous years. The size of the annual debt sale was also cut by Rs 50,000 crore ($7.7 billion). The yield on the benchmark debt plunged 29 basis points, the biggest slide since November 2013, to 7.33 per cent Tuesday.

Lower bond sales allay one of the biggest worries for traders, who have been concerned about the near-record annual borrowing of Rs 6.06 lakh crore, as state lenders stay away from purchases. Talks are also in progress with the central bank to raise limits for foreign investments in rupee debt, according to Economic Affairs Secretary Subhash Garg.

“This is the first step toward a sustainable bull rally in bonds ,” said Sandeep Bagla, associate director at Trust Capital Services India Pvt. in Mumbai. “This is an extremely smart move by the government, realizing the ground realities.”

The longest run of losses in India’s bond market since 1998 has been spurred by a vicious cocktail of rising debt supply, hardening global yields and the prospect of higher interest rates. Concerned by the selloff, the finance ministry last week met primary dealers to assess the mood before the auctions, which normally begin in the first week of April.

Still, not all analysts are cheering the sales reduction. Pushing back the auctions may end up squeezing the market in the fiscal second half when companies are also selling debt, according to DBS Bank Ltd.

Market Selloff

State lenders, the biggest buyers of sovereign debt, have been sellers of an average Rs 509 crore every day this year, data from the Clearing Corp. of India show. They bought an average Rs 36.8 crore daily in 2017.

At the same time, overseas holdings of sovereign and corporate notes are set to decline for a second month. The government faces increasing calls to increase the debt quota allocated to foreigners to more than the 5 per cent currently.

The government also said Monday it plans to sell debt maturing in 1-4 years and 5-9 years, and proposed introducing new 2-year and 5-year benchmark bonds. Primary dealers had told the finance ministry last week there’s more appetite for debt with shorter duration.

The benchmark 10-year yield climbed 126 basis points in the past seven months, threatening to boost borrowing costs for the government and prompt a repeat of a recent situation when it had to pare the size of few auctions and scrap others.

“They want to ensure that the overall interest-rate structure in the economy remains well behaved,” said Vijay Sharma, executive vice president for fixed-income at PNB Gilts Ltd. in New Delhi. “If yields keep going up, then all other rates in the economy go up. The bearish sentiment takes a backseat for now.”

