Looming political uncertainties between South Asia’s neighbouring nations saw Pakistan dollar bonds plunge after India revoked the special status on Kashmir on Monday.
A 10-year paper issued in 2017 yielded 6.83 per cent Monday versus 6.46 per cent last Friday, a sharp 37 basis points drop. Bond yields rise when prices fall. In the last three trading sessions, it plummeted over 65 basis points. A basis point is 0.01 percentage point.
The drop reflects investor anxiety over the country’s ability to repay overseas obligation, said a Singapore-based dealer from a large bank, who tracks Pakistani bonds.
Back home in Mint Street, Indian benchmark bond yields rose four basis points to 6.39 per cent Monday.
“The country’s ability to absorb shocks is limited compared to India. Investors are factoring a risk premium with increasing geopolitical uncertainties,” said the person cited above.
Pakistan’s foreign exchange reserves were at $8 billion in the week ending July 12, compared to India’s $427.6 billion around the same time.
Pakistani economy has been straggling and the International Monetary Fund approved a USD 6 billion loan over a period of three years for the cash-strapped country.
Pakistan sells bonds overseas paying higher premium, which could be half of it if New Delhi taps offshore investors to sell sovereign bonds.
Islamabad’s GDP growth rate is expected remain 3 per cent this year compared with 7 per cent, New Delhi’s projected GDP growth during 2019-20.
India revoked the special constitutional status of Kashmir amid protests from select Opposition parties. Some experts believe that such move would lift local economy in Kashmir through business activities.
But critics said it risks aggravating an already fraught security relationship with rival Pakistan on the cross border matters. Article 370 of the Indian Constitution has given autonomous state status to the government of Jammu & Kashmir for past seven decades.
A little after the Indian government revoked Article 370, Pakistan condemned the move, saying it will exercise all possible options to counter the “illegal steps,” fanning speculation it will precipitate geopolitical conflicts in the region in coming days .