Indian two thousand and five hundred rupee banknotes are arranged for a photograph in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)  

Bond Rout in India Set to Deepen as Modi Widens Deficit Targets

(Bloomberg) -- The Indian government’s budget plan to increase spending and widen its fiscal-deficit targets threatens to deepen the nation’s longest debt rout in almost two decades.

The administration will aim for a budget shortfall of 3.3 percent in the fiscal year starting April 1, Finance Minister Arun Jaitley told lawmakers in New Delhi Thursday, wider than its previous goal of 3 percent. The deficit is estimated at 3.5 percent for the current period ending March 31, compared with 3.2 percent seen earlier. Bond yields rose and the rupee fell following the announcement.

The revisions come as Prime Minister Narendra Modi’s ruling party looks to woo rural voters and create jobs before as many as eight state elections in 2018 and national elections next year. His government plans to borrow a gross 6.06 trillion rupees ($95 billion) from the market in the year ending March 2019, according to budget documents.

Bond Rout in India Set to Deepen as Modi Widens Deficit Targets

“The borrowing numbers are in line with market expectations, but the absorption capability of the markets is in doubt, as state-run banks have reduced participation in recent days,” said Sandeep Bagla, associate director at Trust Capital Services India Pvt. in Mumbai.

The fiscal slippage, along with a proposed hike in minimum guaranteed prices for certain crops, is likely to make the Reserve Bank of India more hawkish as it looks to rein in accelerating inflation, he said.

India’s 10-year yield has climbed for sixth straight months, the longest stretch since 2000, as concern about rising bond supply, along with worries over faster inflation and a potentially wider deficit spooked investors. State-run lenders are the biggest holders of government bonds.

The yield on sovereign bonds due January 2028 jumped 10 basis points to 7.53 percent. A close at that level will be the highest for a benchmark 10-year security since March 2016. The rupee weakened as much as 0.5 percent before trading down 0.2 percent at 63.69 per dollar.

The 10-year yield may rise to as high as 7.70 percent by the end of June, according to Badrish Kulhalli, Mumbai-based fixed-income manager at HDFC Standard Life Insurance Co.

“The big issue is that demand remains weak and in such a situation if additional demand levers are not found, we’ll continue to see yields climb higher,” he said.

©2018 Bloomberg L.P.