Fears Of A Breach Of Fiscal Target Making Bond Markets Nervous, Axis MF Says
What is worrying the bond markets?
The Economic Survey suggesting a need for pause in fiscal consolidation and a fear of a higher-than-anticipated fiscal deficit target has worsened the sell-off in bond markets, according to R Sivakumar, head of fixed income at Axis Mutual Fund.
"There is some fear that the fiscal breach may be larger than anticipated," Sivakumar told BloombergQuint.
Bloomberg Economics expects Finance Minister Arun Jaitley to target to reduce the deficit to 3 percent of GDP in his budget speech Feb. 1. Most economists, however, expect that hitting a 3 percent fiscal deficit in 2018-19 may be difficult if the gap for the current year settles at a level higher than the targeted 3.2 percent.
These concerns, together with worries about higher oil prices, have pushed up bond yields. The 10-year government bond yield rose 15 basis points to 7.44 percent on Monday, extending the rise to 1 percent over the past six months.
Watch the full conversation here:
Edited excerpts from the interview:
What got bond markets worried yet again?
Worries due to fiscal consolidation and global factors, both have weighed on the markets. Fiscal consolidation fears have ruled the markets for the past several months. The Economic Survey made it more explicit that they may need to pause the fiscal consolidation target relative to financial year 2017. These may be the key reasons for the sell-off yesterday.
A pause in fiscal consolidation for financial year 2018 was already priced in by the markets. Wasn’t it?
There are two parts to this. One is a pause in fiscal consolidation for the general government fiscal deficit relative to the previous fiscal. There is a possibility that they may acknowledge that the Centre has a higher fiscal deficit than it had in 2017, which perhaps is the first acknowledgement that they are not talking about. It will be a pause for the Centre but a breach of the previous year’s number. That, certainly, has worried the markets. The expectation was, in the worst scenario, to keep the same fiscal targets as the previous year.So I think there is some fear that the fiscal breach may be larger than anticipated.
Also, remember that one year’s breach has knock-on effects. For example, if at the end of the year our fiscal deficit is at 3.5 percent of the gross domestic product, it is very unlikely that the next fiscal will be 3 percent. We may again have an intermediate stop at 3.2 or 3.3 percent. The entire process of getting to 3 percent fiscal deficit, is pushed forward may be by a year or two.
The Economic Survey explained that higher government borrowing does not correlate directly to the underlying fiscal deficit because the National Small Savings Fund comes into play. Did that market take away anything from that?
If you look at the collections and NSSF, I think they have broadly tracked the estimates for this year. I am not sure if that is the swing factor for this year. More importantly, as the survey acknowledged, the states have cut back on NSSF borrowings which means the states are tapping more from the markets.
We have seen that over the last couple of years the spread of state development loans over central government bonds climbed as a result of high issuance. In fact you will find some ‘AAA’ corporate bonds yielding lower than sovereign securities. That is areflection of the extreme case of issuance by some of the states. I think that is what the markets are worried about. It is the aggregate borrowing.
We have high borrowings by the states. We also have higher refinance. There are Rs 2 lakh crore of maturities which needs to be refunded so the gross borrowing number is higher and also Reserve Bank of India’s supply of Rs 90,000 crore to the open market operations.
Look at the overall supply.