Indian bonds recovered from early falls on Wednesday as investors chose to wait for details of the government’s 20 trillion rupee ($266 billion) fiscal package aimed at supporting an economy ravaged by a weeks-long coronavirus lockdown.
Prime Minister Narendra Modi said on Tuesday night that the package was equivalent to nearly 10% of India’s gross domestic product, and was aimed at the multitudes out of work and the businesses reeling under the prolonged shutdown.
Expectations are high that the Reserve Bank of India (RBI) could help support the market by way of a pre-set open market operation calendar, operation twist to manage the maturity curve, or presence in primary auctions or private placements if required, DBS Bank economist Radhika Rao said.
Most analysts said the government would now be looking at a fresh stimulus of roughly 10-12 trillion rupees, after deducting the first stimulus package of 1.7 trillion rupees and the measures taken by the RBI so far.
Traders said market positioning was light, and shorting bonds was not working amid a lack of details on the economic package, helping the pull-back in yields.
Yields are expected to hold in a tight range ahead of the finance minister’s press conference scheduled for 1030 GMT, which could throw more light on specifics of the stimulus package.
Market participants however said they did not expect the government to further increase market borrowings beyond the 4.2 trillion rupees hike announced earlier this month.
The government is scheduled to borrow a record 12 trillion rupees from the market in the current fiscal year to March 2021, and analysts project the fiscal deficit could rise to at least 5.5% of the gross domestic product, sharply above the budgeted deficit of 3.5%.
The Bundesbank must stop buying government bonds under the European Central Bank’s long-running stimulus scheme within three months unless the ECB can prove those purchases are needed, Germany’s top court ruled on Tuesday.
The ruling deals a blow to a scheme, called Public Sector Purchase Programme, that has kept the euro zone’s economy afloat during several crises and raises the prospect of a new conflict between the ECB and its largest shareholder, Germany.
However, the judges in Karlsruhe said their decision did not apply to the ECB’s latest pandemic-fighting programme, a 750 billion euro ($815 billion) scheme approved last month to prop up the coronavirus-stricken euro area economy.
German bonds and the euro sold off of after the ruling, with the benchmark 10-year Bund yield climbing to briefly touch a session high of -0.517% . European stocks cut some gains and the pan-European STOXX 600 index was last up 1.05%.
Ruling in a case that dates back three years, Germany’s top court raised objections to the Bundesbank’s participation in the PSPP, which was launched in 2015 and currently accounts for less than a quarter of the ECB’s monthly asset purchases.
“The Bundesbank may thus no longer participate in the implementation and execution of the ECB decisions at issue, unless the ECB Governing Council adopts a new decision that demonstrates…the PSPP are not disproportionate to the economic and fiscal policy effects,” the judges said.
The judges added the German central bank must also sell the bonds already bought, albeit based “on a – possibly long-term – strategy coordinated with” the rest of the euro zone. German bonds bought under the PSPP were worth 533.9 billion euros at the end of April.
Luis Garicano, a Spanish liberal member of the European Parliament, said the ruling posed a threat to the future of pan-European institutions.
Amassing nearly 3 trillion euros of bonds since 2015, the ECB has long relied on bond purchases to support the economy through crises and a threat of deflation.
As the central bank of the euro zone’s largest economy, the Bundesbank has taken the lion’s shares of those purchases.
With much of the euro zone now in lockdown to halt the spread of the virus, the ECB plans to print another 1 trillion euros to keep borrowing costs down for companies and governments.
But a group of academics in Germany has long argued that the ECB is overstepping its mandate, and that these buys constitute direct financing of governments – a contravention of the central bank’s obligations under the European Treaty.
The German ruling comes after the European Court of Justice has already cleared the scheme, arguing that it does not constitute illegal financing and considers the ECB’s measures proportional.