Pegs gross market borrowing at Rs 6 lakh cr, in line with expectations, but falls short on fiscal front
Traders are gearing up for a range-bound movement in bond yields in the coming weeks as the government’s market borrowing has met expectations, but fiscal consolidation has fallen short.
The Budget has pegged the market borrowing for FY16 at Rs 6 lakh crore on a gross basis and Rs 4.56 lakh crore on a net basis.
Both the gross and net market borrowings were in line with market expectations.
Finance minister Arun Jaitley, however, said the fiscal deficit for the financial year would be at 3.9%, higher than the earlier envisaged 3.6%. Further, the government would be able to bring down the deficit to 3.0% only in three years instead of two.
“The market had to some extent prepared for a slippage in the fiscal numbers as long as it is for growth. It is still a credible fiscal programme,” said NS Venkatesh, head of treasury at IDBI Bank.
Bond traders said yields could harden on an immediate basis but could eventually ease to 7.50%. The 10-year benchmark government bond yield was at 7.73% on Friday.
Most market participants expect the RBI to cut the repo rate by 25 basis points in April when the central bank releases its bi-monthly monetary policy. Analysts expect a total of 50-75 bps cut in 2015.
In his speech, Jaitley said the government expects retail inflation to come down to 5% by March 2016, which would give the RBI more room to cut rates. Consumer price index (CPI) inflation has eased to 5.1%, according to Jaitley. The RBI has predicted inflation at 6% by March 2016.
The central bank had slashed repo rate by 25 bps to 7.75% on January 15 citing easing inflationary pressures.
Market participants say another key factor is the move towards inflation targeting as the government has proposed to change the RBI Act so that the RBI will be mandated to meet an explicit inflation target. The finance minister said the RBI would be mandated to keep inflation below 6%.
This was part of the recommendations of an internal committee of the RBI chaired by deputy governor Urjit Patel. The committee had recommended targeting retail inflation at 4% with a band of +/- 2% in the medium term.
“The market now needs more clarity on the monetary policy committee and how it would affect policymaking,” said Ananth Narayan G, regional head of financial markets, South Asia, at Standard Chartered Bank.
Some market partipants feel that with a committee deciding the central bank’s rate action, the autonomy of the governor would be reduced.
“One needs to see the composition of the monetary policy committee and whether industry representatives would be included in which case the pressure to cut rates could increase on the RBI,” said a bond trader with a foreign bank.
With clarity on tax rules, foreign investment into Indian shares and bonds is expected to continue. Foreign institutional investors have already poured in $5.4 billion into Indian bonds so far in 2015. Although investment limits in government securities were exhausted by August, some market participants expect a hike in the limits.
FIIs have been increasing their investments in corporate bonds ever since and in total now hold $67 billion of Indian bonds.