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Will extra borrowing lead a bloodbath in bond market?

By Saikat Das

MUMBAI: A roller coaster ride awaits India&#..


By Saikat Das

MUMBAI: A roller coaster ride awaits India's bond market early in the new year, with potentially higher borrowings by New Delhi threatening to dent investor confidence in the country's fiscal health and lessening the likelihood of further reductions in the cost of capital.

"There is no respite from anywhere in the bond market," said Naveen Singh, senior vice-president at ICICI Securities Primary Dealers. "An expected fiscal slippage will trigger the panic button in the market amid other global factors. We are likely to see a spurt in bond yields…The debt market may now stare at rate hike possibilities next year, subject to the final fiscal deficit number."

The government will borrow Rs 50,000 crore extra by selling sovereign bonds between January and March. This could mean that the estimated fiscal deficit target at 3.2% of Gross Domestic Product (GDP) in FY17 may widen by about 50-60 basis points, dealers said.

The benchmark bond yield may rise 25-30 basis points in the next one month, dealers said. It closed at 7.22% Wednesday, about four basis points lower than Tuesday. In the past five months, the benchmark bond yield has shot up by about 80-85 basis points.

During the day's trading, the yield hit a high of 7.31, a level not seen since July 15 last year. Yields may rise 10-12 basis points Thursday, pulling prices down.

Bond yields and prices move in opposite directions.

Rising global crude oil prices have raised India's inflationary expectations, which remain the key gauge for monetary policy decisions. India has also seen lower tax mop-up with cuts in the Goods and Services Tax (GST) rates.

"This (extra borrowing) implies that fiscal consolidation has been pushed down the road a bit more," said Sandeep Bagla, associate director at Trust Capital Services. "It has also raised doubts on how much the government will borrow next year. The current scene confirms the debt market's worst fears that the fiscal situation is not improving."

The government plans to offset additional borrowing through a reduction in treasury bills of more than Rs 60,000 crore. T-bills have maturities of less than one year.

Finance Minister Arun Jaitley had earlier budgeted raising Rs 5.8 lakh crore in 2017-18 via bond sales to plug the fiscal deficit.

"The extra borrowing will exert pressure on government bonds," said Soumyajit Niyogi, Associate Director at India Ratings & Research. "The critical aspect is the likelihood of a wider fiscal gap, something the debt market would closely watch."

The Reserve Bank of India released the revised borrowing calendar on Wednesday, more than a month after Moody's Investors upgraded India's sovereign rating for the first time since 2004.

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