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.
The government plans to borrow nearly Rs 4,00,000 crore from markets during 2009-10, a rise of about 50% from the previous year. The net market-borrowing of the government through the issue of dated securities in 2009-10 is estimated at Rs 3,97,957.46 crore.
S Sridhar, CMD, Central Bank of India, said,”On interest rates, let me say that the short-term interest rates are low, but G-Sec is still hardening. If you see the inflation scenario, the WPI is nearly at zero level, but CPI is much higher. This means a tightrope walking for banks.??
The banks?s cost of funds and cost of deposits are also high. ?Looking that we are looking at our credit portfolio. So, rate-cut may be a possibility, but not immediately,?? he added.?For the infrastructure sector, we will get allocation of some funds, which has been increased in the Budget for various schemes of infrastructure, through IFCL and we will pass on the major costs to our borrowers. Our focus is on core areas like power, telecom, port and airports,” he further explained.
Shikha Sharma, managing director & CEO , Axis Bank, said that although in the short-run, the liquidity may get sucked from the system and hence, yields could get affected. ?However, the exact impact of this phenomenon would be felt after the announcement of the forthcoming monetary policy,?? she said.
Abheek Barua, chief econnomist, HDFC Bank, argued that the fiscal deficit of 6.8% of GDP that the Budget targets for in 2009-10 (the interim budget forecast was 5.5%) is higher than even the most pessimistic forecasts.
It thus entails a much larger market borrowings programme (net borrowings of close to Rs 4,00,000 crore) than the markets had estimated.?What could this do to the cost of borrowing? A slowdown in economic growth has meant that private demand for funds is weak.
Coupled with the RBI?s policy of flooding the markets with money, it has meant that ?liquidity? in the money markets is comfortable.
Thus, high government borrowing does not necessarily mean a sharp spike in interest rates in the near term,?? he explained.?However this comfort could turn out to be ephemeral? at the first sign of economic recovery and increased private sector appetite for funds, be prepared for a rise in interest rates,” he said .
“Meanwhile the RBI will meet the government in July to decide the borrowing calendar, to ensure adequate credit flow to productive sectors,” said RBI deputy governor Shyamala Gopinath.
The rupeefell in tandem with a plunge in local stocks and ended 65-paise weaker at a nearly two-week low of 48.54/56 against the US currency on a fairly good dollar demand.
Fears about capital outflows from equity markets after the Union Budget was presented weighed on rupee sentiment.The Indian benchmark Sensex registered a steep fall of 870 points or 5.83% after the Budget disappointed investors.
Stable at the outset, the domestic currency later fell sharply in line with the slide in equity markets. It had closed at 47.89/91 a dollar on Friday. Dealers at the Interbank Foreign Exchange market said banks built up dollar positions as the rupee moved lower after the finance minister presented the Budget.
The dollar, however, weakened against the Japanese yen, but strengthened against the euro in overseas markets.Dealers added the that Budget’s sharply higher fiscal deficit target 6.8% for the financial year 2009-10 too had an adverse impact on the rupee.