Government bonds fell the most in a month-and-a-half on Tuesday, extending losses for a third session, on worries a massive food subsidy programme for the poor will aggravate the fiscal deficit, also sending the rupee to a record low.
The Lok Sabha approved a plan worth R1.35 lakh crore ($20.94 billion) on Monday to provide cheap grain to the poor, which is expected to be a key election plank as the Congress-led United Progressive Alliance aims for a third term.
Finance minister P Chidambaram on Tuesday reiterated the government will not breach the 4.8% fiscal deficit target, but investors appeared worried about the government’s resolve to keep a tab on spending ahead of national elections due by May. The resurgence of worries about the fiscal deficit comes as a record low rupee continues to exacerbate concerns about the current account deficit.
“I will be happier if the finance minister says how the government will accommodate the food security Bill. The market fears the Bill might be one in a queue of many populist measures with eye on elections,? said Killol Pandya, a senior fund manager-debt at LIC Nomura Mutual Fund.
The benchmark 10-year bond yield rose 44 basis points to 8.78%, its biggest rise since RBI unveiled its first cash-tightening steps on July 15. Yields have risen 52 bps in the past three sessions. Volumes remained low at R15,260 crore.
Bonds fell even after RBI said on Monday it will buy R8,000-crore ($1.24 billion) government bonds through an open market operation on August 30.
In the overnight indexed swap market, the benchmark five-year rate closed up 36 bps at 8.78%. The one-year rate ended higher 34 bps at 9.84%.