Since November 8, 2016, the yield on the 10-year benchmark government bond declined by close to 40 bps.
Government BONDs rallied briefly in intraday trade on Wednesday before closing nearly flat, after finance minister Arun Jaitley budgeted for net market borrowing of R3.48 lakh crore for the fiscal ending March 2018. This is lower than the net borrowing of R4.25 lakh crore in 2016-17.
On Wednesday, the 10-year benchmark yield closed at 6.43%, up 2 basis points from the previous close, after dropping to an intraday low of 6.37%. In the absence of lending opportunities and a deluge of deposits into the banking system as a result of demonetisation, banks have been investing more in government bonds. Between November 8 and January 31, the yield on the 10-year benchmark government bond declined by close to 40 bps.
Also, the finance minister pegged the fiscal deficit target for FY18 at 3.2% of the GDP and said the government continues to remain committed to bringing it down to 3% in the following year. This and the net borrowing figure were broadly in line with expectations of market participants.
“I think the fiscal deficit number was slightly higher than the market was hoping for because a lot of people were looking forward to seeing 3% instead of 3.2%. This is also why there was a sell-off immediately after the announcement. However, the market must have eventually realised that this is the best he could do, so yields did soften a little bit after that,” said Ashutosh Khajuria, ED and CFO at Federal Bank.
The banker also pointed out that the net borrowing figure of R3.48 lakh crore was exclusive of R75,000 crore of buyback that the government is planning to do in FY18.
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Other market participants had similar views pertaining to the fiscal numbers. “The market looked lacklustre today and it is expected to continue looking like that in the immediate term. The numbers are broadly in line with expectation and the reason why the market was not over-enthused by the budget was because the fiscal deficit number came in at 3.2% instead of 3%. We expect the benchmark bond yield to trade in a thin band — between 6.35% on the upside and 6.45% on the downside,” said Lakshmi Iyer, CIO, debt, at Kotak Mahindra Asset Management Co.