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Bond Yields End Higher On Government Borrowing Fineprint

Gross borrowings in line with market expectation but real net borrowing higher than projected

Brokers speak on the telephone during trading hours inside a dealing room at a bank in Mumbai, India (Photographer: Abhijit Bhatlekar/Bloomberg News)  
Brokers speak on the telephone during trading hours inside a dealing room at a bank in Mumbai, India (Photographer: Abhijit Bhatlekar/Bloomberg News)  

Bond yields first fell on lower net borrowings planned by the government in fiscal 2018, only to rise later as traders turned skeptical about the number. The fiscal deficit target of 3.2 percent of GDP for 2017-18 was in-line with market expectation.

Bond yields ended the day at 6.43 percent, 3 basis points higher compared to 6.40 percent on Tuesday. Yields touched a high and low of 6.45 percent and 6.37 percent respectively.

 Bond Yields End Higher On Government Borrowing Fineprint

The initial positive reaction was in response to the Finance Minister’s speech where he said that the net government borrowing during the year would be restricted to Rs 3.48 lakh crore.

The budget documents, however, showed that the net borrowing accounts for Rs 75,000 crore in buybacks. After accounting for that, the real net borrowing number works to be near Rs 4.23 lakh crore as compared to Rs 4.06 lakh crore for in fiscal 2017.

The gross government borrowing for the year is set at Rs 5.8 lakh crore, according to the budget documents.

Union Budget 2017-18 was on expected lines as the government adhered to the fiscal consolidation road-map. The 3.2 percent fiscal deficit target for FY18 and 3 percent for FY19 was pretty much on expected lines. Also, the borrowing number was quite positive for the market since this means the government would be funding 76 percent of its fiscal deficit by market borrowing in next fiscal, as against 83 percent last year. Much of this deficit is now estimated to be funded via small savings.
Manish Wadhwan, Head of Interest Rates, HSBC India

While the government chose to peg the fiscal deficit target for fiscal 2018 at 3.2 percent, Finance Minister Jaitley said the government intends to bring down the deficit to 3 percent by fiscal 2019.

The government also took note of the recommendations of the committee set up to review the Fiscal Responsibility and Budget Management (FRBM) Act . The committee has recommended the government maintain a fiscal deficit of 3 percent for the next three years.

In addition, the committee wants the debt-to-GDP ratio to become a focus point for government finances and suggests that the government reduce the ratio to 60 percent of GDP by 2023.

Union Budget 2017-18 was a prudent one for bond market as government stuck to its fiscal consolidation path, which now would be bit slower than previously envisaged path. Nevertheless, this is a big positive for the bond market. No drastic change in size of market borrowing also bodes well for the market. However, all eyes now would now turn to RBI’s monetary policy on February 8, wherein a 25 basis points cut looks likely. We, however are not expecting India’s central bank to slice rates in a bigger quantum than this going forward.
Neeraj Gambir, MD & Head - Fixed Income, Nomura India