Bond markets tanked on Friday on higher-than-expected fiscal deficit and bloated borrowings announced by the government. Bond prices fell sharply and yields rose as market had expected a higher supply of government securities in the coming fiscal. This, coupled with the RBI?s decision on Thursday to keep policy rates unchanged, dashed hopes of any rally in the bond market.
Banks, the largest buyers of government bonds, will have to book losses on a portion of their total portfolio which is marked to market. Financial markets also seemed sceptical of the government?s commitment towards fiscal consolidation. Finance minister Pranab Mukherjee announced that the fiscal deficit ? excess of expenditure over revenues ? will be 5.9% by March-end, much higher than the 4.6% projected earlier.
Mukherjee hoped to lower this to 5.1% in 2012-13 on higher tax revenues, even as no concrete steps has been outlined to curtail expenditure or improve spending quality. The yield on the benchmark 10-year government paper was up nearly 20 basis points at 8.43% on Friday.
The government was targeting R5.7 lakh crore of gross market borrowing in 2012-13, higher than the revised R5.1 lakh crore for FY12, raising doubts over the government?s ability to keep its finances under control.
?The financing of the fiscal deficit will be a challenge as industry can demand higher credit going forward. The figure of R5.7 lakh crore is large. This will definitely put pressure on liquidity and push up interest rates,? said Care Ratings MD & CEO DR Dogra.
Lower tax collections, higher fuel & fertiliser subsidies and significant shortfall in non-tax revenues such as from disinvestment pushed up deficit. Besides, a key assumption ? oil price at an average of $90 a barrel in the current fiscal ? wrecked government?s fiscal maths.
Average crude oil price taken into budgetary calculations for the next fiscal is $115 a barrel, economic affairs secretary R Gopalan said on Friday. In case oil flares up above this level in the next fiscal, all the numbers will go haywire. Any decline will be a blessing in disguise for Mukherjee. Lingering sovereign debt crises in the eurozone remains another key risk to the economy.