Budget 2016: Bonds rally on fiscal deficit target cue

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New Delhi | Published: March 1, 2016 12:06:00 AM

Benchmark yield fell 16 basis points to 7.62%, highest single day fall since May last year

With the net market borrowings for the fiscal year 2016-17 being budgeted at Rs 4.25 lakh crore and the government staying on course of its projected fiscal deficit target of 3.5%, bonds rallied on Monday with the benchmark 10-year yield falling by 16 basis points to over a month-low levels.

The 7.59% yielding 10-year benchmark yield fell 16 basis points to 7.62%, which is its lowest level since January 21 this year. It fell to as low as 7.60% in Monday’s intraday trade.

The yield on the 7.72% 2025 bond, the old benchmark, also fell by 21 basis points to 7.79%, which is its lowest level since January 29.

Ajay Manglunia, executive vice-president at Edelweiss Securities, observed that the government sticking to the FY17 fiscal deficit target of 3.5% has been taken positively by the bond markets.

“Moreover, the net borrowing announced by the government is also a very attractive figure. As a result, the bond yields have fallen considerably in Monday’s trade,” Manglunia added.

Meanwhile, the Budget also stated that in order to improve greater retail participation in government securities, the RBI will facilitate their participation in the primary and secondary markets through stock exchanges and access to the NDS-OM trading platform.

Bond yields had shot up in the weeks leading to the Budget led by an over-supply of high-yielding state bonds. Over `21,000 crore of SDLs were auctioned a few days back, with the highest cut-off yield hitting 8.88%, while the lowest cut-off yield had touched 8.63%.

However, the decision to adhere to the fiscal deficit target of 3.5% came as a big breather to the bond market. The government has announced the net market borrowing at `4.25 lakh crore. This is lower than the current fiscal year’s figure of `4.41 lakh crore.

Ratings agency Standard and Poor’s said in a release that without marked improvements in the general government’s fiscal out-turns and accompanying declines in net debt, it does not expect to change the rating on India
(BBB-/Stable/A-3) this year or next, based on its current set of forecasts.

“If economic growth, interest rates, and food prices differ markedly from budgetary assumptions, the government may have to reduce capital spending again to contain the budget deficit.

This could further weaken the country’s economic growth potential,” S&P added.

The rupee also strengthened against the dollar as it appreciated 0.3% to close at 68.42 on Monday. The currency was hovering close to its all-time lows over the last few days, led by sell-off in the debt market by foreign investors.

According to latest data till February 26, foreign portfolio investors (FPIs) remain net sellers of Indian debt at $1.01 billion on a year-to-date basis. In the last six consecutive sessions, FPIs have sold $1.18 billion of Indian debt, according to Bloomberg data.

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