Bonds Aren’t Budging in India Even as Goldman Sees More Easing
Commuters cross a road near Chhatrapati Shivaji Maharaj Terminus railway station in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Bonds Aren’t Budging in India Even as Goldman Sees More Easing

(Bloomberg) -- The chatter about a massive fiscal stimulus is continuing to haunt India’s bond trading floors.

Yields have barely budged lower after data on Friday showed growth hitting a six-year low. Predictions of deeper interest-rate cuts by Goldman Sachs Group Inc., and others, have been shrugged off by normally bullish debt traders.

The reason: traders are worried the weak GDP print may force the government to deliver a big revival package, which it has so far resisted. Fears of stimulus adding to already record borrowings led to benchmark sovereign notes capping their worst performance in 16 months in August.

Bonds Aren’t Budging in India Even as Goldman Sees More Easing

“The deeper-than-expected slowdown in growth has raised hopes for rate cuts, but on the flip side, it also raises the risk of fiscal stimulus,” said Naveen Singh, head of fixed-income trading at ICICI Securities Primary Dealership in Mumbai. “Revenue collections may also continue to remain low as seen by the latest goods and service tax numbers.”

Skepticism over the government’s fiscal restraint has persisted even after Finance Minister Nirmala Sitharaman desisted from any major fiscal break in her package to boost growth. Bond gains sparked last week by a record fund transfer from the central bank to the exchequer didn’t last even one session as traders feared the cash may be used to pump-prime the economy instead of plugging the deficit.

Aggressive Easing

The central bank has been doing its bit to lift growth. It has cut interest rates four times this year, the most aggressive of central banks in Asia. Goldman is now seeing possibility of 50 basis points of cuts in the fourth quarter versus previous prediction of 25 basis points. Nomura Holdings Inc expects reductions of 40 basis points, more than double the 15 basis points projected earlier.

The benchmark 10-year yield fell one basis point to 6.51% on Wednesday. It rose 19 basis points in August, the most since April 2018. The nation’s fiscal gap has already reached 78% of the target for the full financial year in the first four months through July, data showed Friday.

“Overall, tax revenues will likely disappoint again, particularly with nominal GDP growth slowing down,” Kotak Mahindra Bank economists including Suvodeep Rakshit wrote in a note. “Room for a fiscal stimulus will be minimal without compromising on the fiscal deficit target.”

©2019 Bloomberg L.P.

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