Rupee Slides With Indian Bonds as Fiscal Deficit Concerns Rise

(Bloomberg) -- India’s rupee sank the most since May and sovereign bonds slumped on concern the nation’s fiscal deficit will widen after the government said it was considering measures to boost growth.

Policy makers are studying economic indicators and appropriate action will be taken at the right time, the Finance Ministry wrote on Twitter Thursday, citing Finance Minister Arun Jaitley’s speech at an event. Concerns about India’s public finances heightened as the ET Now television channel wrote in Twitter posts that the government was weighing a stimulus package of 400 billion rupees ($6.2 billion).

No decision has been taken so far on the stimulus, D.S. Malik, spokesperson for the ministry, said by phone. The TV channel, which cited unidentified people familiar with the matter, said Prime Minister Narendra Modi was likely to relax the deficit target for the year ending in March. The goal has been set at 3.2 percent of gross domestic product. The government will announce economic measures after consulting Modi, Jaitley said on Wednesday.

“The market is grappling with this new risk,” said Vijay Sharma, executive vice-president for fixed income at PNB Gilts Ltd. in New Delhi. “There is uncertainty about how the government is going to finance the stimulus.”

The rupee sank as much as 0.9 percent, the most since May 18, to 64.84 per dollar, before closing down 0.8 percent at 64.7950. The yield on the benchmark 6.79 percent bonds due 2027 surged 10 basis points to 6.68 percent, its highest close since May 24. It was also the biggest daily increase in the yield since the securities were issued mid-May.

India’s fiscal deficit already reached 92 percent of the budget estimate in the first four months of the financial year that began April 1, according to the Controller General of Accounts.

“While growth has been impacted and is weighing on the minds of investors, now the slippage on fiscal-deficit target could take away the chance of a rating upgrade, which the market and government had been hoping for,” said Gopikrishnan MS, head of foreign exchange, rates and credit for South Asia at Standard Chartered Plc in Mumbai.

--With assistance from Ravil Shirodkar and Vrishti Beniwal

To contact the reporters on this story: Subhadip Sircar in Mumbai at ssircar3@bloomberg.net, Kartik Goyal in Mumbai at kgoyal@bloomberg.net.

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Shikhar Balwani