Deficit, govt borrowings to impact rates, Re

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: Finance minister Pranab Mukherjee's attempt to strike a balance between growth and fiscal concerns in the 2009-10 Budget came in for praise from bankers, even as they thought that increased borrowing by the government may jack up interest rates and push the rupee downward.

The five-year bonds dropped the most in three weeks as the government said that its budget deficit would reach an estimated 6.8% of gross domestic product in the year ending March 31, the most since 1994.The yield on the 6.07% note due 2014 jumped 13 basis points, or 0.13% point, to 6.36% India’s five-year bonds dropped the most in three weeks as the government said that its budget deficit would reach an estimated 6.8% of GDP in the year ending March 31, the most since 1994.

The yield on the 6.07% note due 2014 jumped 13 basis points, or 0.13%, to 6.36%.The benchmark 10-year bond yield has added 1.79 percentage points, the biggest gain in at least a decade, to 7.04%, according to Bloomberg data. The rupee tumbled in tandem with a plunge in local stocks and today ended 65-paise weaker at a nearly two-week low of 48.54/56 against the US currency on fairly good dollar demand.

“It is an excellent Budget, we have to take a balanced view as things cannot change overnight. Every time it is not possible to please everybody," State Bank of India chairman, OP Bhatt, said.

Asked whether increased market borrowing would have any impact on interest rates, Allen C A Periera, chairman & managing director, Bank of Maharashtra,said it may harden interest rates in the short term. Renu Sud Karnad, joint managing director, HDFC, said that the fiscal deficit has cautioned the market participants. With the expectation for the number being at 6.2%, the actual percentage at 6.8%, was unexpectedly higher.

"This leads us to speculate on the direction of medium-term interest rates. Presently interest rates are tending lower, with banks cutting deposit rates and lending rates.An excess of government paper in the market is likely to create some sort of upward pressure on the interest rates going forward,’’she said.