Post-Budget boost: Bond market rallies on lack of additional borrowing in FY20

Bonds rallied on Monday with the 10-year benchmark yield closing 10 basis points (bps) lower to hit a one-month low of 6.50%, as market participants cheered the fact that no additional borrowing would be seen in the current fiscal.

The government pegged its net market borrowing for fiscal 2021 at Rs 5.36 lakh crore and the revised figure for FY20 at Rs 4.99 lakh crore during the Budget. The gross market borrowing for FY21 has been pegged at Rs 7.8 lakh crore, while for FY20 the revised figure remains unchanged at Rs 7.1 lakh crore.

At the same time, the rise in fiscal deficit revised estimate (RE) for FY20 at 3.8% and the target for FY21 at 3.5% were also in line with market expectations.

As PNB Gilts senior executive vice-president Vijay Sharma pointed out, the Budget was not worse off than what the market was expecting. “The borrowing number was in line with what the market was anticipating. Moreover, for the next two months, there is an absolute clean slate as far as borrowing is concerned. Also, Indian bond markets did not participate in the rally seen in recent times led by a fall in crude prices due to the Budget overhang. With that uncertainty over, we are seeing a catch-up rally with what happened across the globe. The benchmark yield is seeing a support at 6.48-6.50% levels and if it goes below 6.48%, further gains could be expected,” Sharma said.

Indeed, yields have been stable over the last few days in anticipation of the Budget, not taking into account the fall in crude prices. Oil prices had fallen recently due to concerns surrounding Chinese demand for crude. Brent crude fell to over one-year lows and was trading at $56.43 per barrel on Monday. Moreover, US Treasury yields were also on the downtrend in recent times with the 10-year US Treasury yield hitting a 10-month low of 1.50% recently.

These factors had not reflected in the Indian bond yields lately as market participants were waiting for the Budget. Siddharth Shah, STCI Primary Dealer’s head of treasury, told FE that positive sentiment due to no additional borrowing this fiscal had contributed to the rally in the bond markets.

“There is also the fact that some short positions prior to the Budget have been unwound. As far as OMOs are concerned, we believe there is scope for a few to be announced before the end of this fiscal. However, in the upcoming monetary policy, we don’t expect any rate action,” he said.

Rupee drops by 6 paise to end at 71.38 on forex outflows.

The rupee pared early sharp losses to settle 6 paise down at 71.38 against the dollar on Monday, tracking recovery in domestic equities and easing crude oil prices.

The rupee remained under pressure due to concerns over fiscal slippage and rising coronavirus outbreak fears, forex traders said.

The next trigger for the currency will be the Reserve Bank of India’s monetary policy meeting, as its commentary on inflation as well as growth forecast would be keenly watched.

At the interbank foreign exchange market, the local currency opened at 71.62 and fell further to touch a low of 71.66. Mirroring the recovery in equities, the local unit cut losses to touch a high of 71.32. The unit finally settled at 71.38, down by 6 paise over the previous close.

The rupee had settled at 71.32 against the American currency on Friday.