Will the borrowing cut be past or prologue for the bond market?
Past is prologue, so said Shakespeare. For the bond market, whether this is true will be only revealed on 1 February.
Bond yields, that have been rising incessantly since June last year, dropped a massive 16 basis points on Wednesday after the government said it would borrow Rs30,000 crore less than previously stated. The lower-than-feared borrowing has fired up hopes that the centre is serious about keeping its fiscal deficit under check in a year when India garnered a rating upgrade.
For now, it has also made traders conveniently forget that the government, in fact, is indeed borrowing Rs20,000 crore more than it originally estimated.
The trend in tax revenues doesn’t offer any hope of a reduction in the deficit in the current year. Goods and services tax collections have fallen for the second straight month.
Also, there remains the assumption of nominal gross domestic product growth of 11.5% for calculation purposes, which in reality is likely to be lower. The Central Statistics Office’s own estimate of the same is a more modest 9.5%. Other factors that tend to spook bonds, such as rising inflation and falling liquidity, haven’t gone anywhere.
The only positive factor is that the disinvestment target of Rs72,000 crore could be breached and that would give the government some breather.
The big bond investors—banks—are seeing their stocks surge too as falling bond yields would earn them fat treasury profits. But let’s not forget that this bond rally is worth nothing if yields are not lower on the last day of the fourth quarter. Bonds get marked to market on the last day of a quarter by banks in order to see how much of a loss or gain they would end up making. And that can only happen if liquidity is abundant and the future fiscal path is clear.
That brings us to the big question: will the government prune its deficit next year too? There are hopes that the government will follow the path of frugality into the next year in good faith and keep the deficit at 3% level. And this is where the bond market needs to hold its horses.
Headwinds on the political front and the run-up to an election year will make the government hard-pressed to keep populist social agendas out of the budget.
Only the Union budget on 1 February holds the answers to whether this borrowing cut will just be one event in the past or will it be a prologue for the bond market for the next year. Until then, bond traders can enjoy the party.
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