Markets

Bond market on an edge over chances of fiscal slippages

MUMBAI: The government’s second batch of supplementary demand has raised doubts on whether the fiscal deficit will be higher than the budgeted 3.2 per cent of GDP in the fiscal ended March 2018, spiking bond yields on Monday.

Finance minister Arun Jaitley moved the second batch of grants for 2017-18 in the Lok Sabha on Monday which included a net cash outgo of Rs 33,380 crore for the fiscal year ended March 2018. The amount includes spending on developmental works such as providing electricity and other expenses like urea subsidies.

The 10-year bond yield rose to 7.22 per cent on Monday before ending at 7.18 per cent, up from Friday’s close of 7.13 per cent after the Centre sought parliamentary approval for the additional spending. Dealers said the market is confused whether the government will need to borrow more, and if so, then how much.

“There’s confusion on whether this will lead to extra borrowing. In a way, the bond market has been resigned to the fact that we will not achieve the 3.2 per cent target for the deficit this year. Additional borrowing to the tune of Rs 50,000 crore has already been factored in but there is still confusion on how much the final number will be,” said Prasanna Patankar, managing director at STCI Primary dealership, a trader in government bonds.

Trade was volatile on Monday since market was on the edge as results trickled in from the Gujarat assembly elections. At one stage in the morning, leads showed that the Opposition Congress may cause a massive upset, but the ruling BJP clawed back to secure an absolute majority and form the government for the sixth consecutive time.

The rupee also swung with the election results, falling to the day’s lows of Rs 64.72 per dollar on fears that the ruling BJP’s hands may be weakened. It eventually recovered in line with the stock market to close at Rs 64.23 per dollar, down from Friday’s close of Rs 64.04 per dollar.

Excess borrowing by the government has been bothering traders this year after the sovereign spending breached 96 per cent of the fiscal deficit in August. However, finance minister Jaitley has reiterated the government’s commitment to stick to its 3.2 per cent fiscal deficit target.

“Right now, the market is still not sure where the extra borrowing will come from. It is looking at the supplementary demand as an investment with the hope that the government will find the revenues from the divestment receipts as well as higher tax payments from the GST. But dealers are wary that if the borrowing is more, the benchmark yield will breach the 7.20 per cent level convincingly,” said Harihar Krishnamoorthy, head of treasury at FirstRand Bank.

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