Bonds Advance in India as Government Hints at Holding Fiscal Gap
The Modi government will present its first budget Friday after being re-elected with an increased majority.
(Bloomberg) -- Sovereign bonds in India rallied after a government adviser said that Prime Minister Narendra Modi’s administration will stick to its fiscal deficit path, easing concerns of a widening in the gap to finance spending.
The ruling party will present its first budget Friday after being re-elected with an increased majority. Traders have been fearing a possible breach of the 3.4% fiscal deficit aim announced in February as the government seeks to boost growth from a five-year low.
“The key concern for the market was whether in light of the slowdown in growth and tax collection, if there was going to be slippage,” said Badrish Kulhalli, head of fixed income at HDFC Life Insurance Ltd. in Mumbai. “The market took a cue from the statement made by the chief economic adviser regarding commitment to stick to fiscal consolidation.”
There’s a risk of crowding out investment with a widening of the budget gap, Chief Economic Adviser K.V. Subramanian told reporters after the release of the economic survey.
“We will be sticking to the fiscal deficit path,” he said. “If investments, specially private investment has to be fostered, crowding out cannot happen. That is something we have made very clear.”
The benchmark 10-year bond yield dropped 7 basis points to 6.76%, extending the decline since the end of April to more than 50 basis points.
Yields may dip below 6.5% if the government sticks to its deficit target and the central bank cuts rates further, said Harish Agarwal, bond trader at FirstRand Bank in Mumbai.
The rupee also gained, partly also helped by a court ruling allowing the sale of Essar Steel to ArcelorMittal. The sale is expected to involve about $6 billion of inflows to the forex markets. The currency gained as much as 0.6% against the dollar.
--With assistance from Vrishti Beniwal.
To contact the reporters on this story: Subhadip Sircar in Mumbai at ssircar3@bloomberg.net;Ragini Saxena in Mumbai at rsaxena30@bloomberg.net
To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Ravil Shirodkar
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