P. Chidambaram has always been a darling of the markets. How else can you explain that bond yields are trending down, especially after the central bank announced another sale of government securities worth Rs 15,000 crore on Friday?
Two phrases from the new finance minister’s speech on Monday were music to bond investors’ ears. One, he talked about unveiling a “path of financial consolidation”. Second, Chidambaram noted that “current interest rates are high” and “it is necessary to take carefully calibrated risks in order to stimulate investment”.
Finance minister P. Chidambaram.
Of course, it remains to be seen exactly how the finance minister will bring the fiscal deficit down. One easy-go area for plugging the gap could be selling mobile spectrum. The government has already selected an auctioneer and set a base price. A section of the market fondly hopes that history will repeat itself. Remember in 2010, the government had budgeted for Rs 35,000 crore from spectrum sales and mopped up almost thrice that amount.
But a re-run of those events appears unlikely. For one, the government is willing to stagger the payments it will receive from the auction and will receive only one-third of the sale price upfront. Much will depend, however, on the discount rate—if it’s too high, some companies may decide to pay upfront rather than go in for staggered payments. Secondly, will telecom companies be willing to bid as competitively as they did a couple of years ago? As it is, many of them are struggling under high debt burdens and bank funding is unlikely to be easy to get. Forget exceeding the Rs 40,000 crore target from spectrum sales, some telecom analysts are willing to bet that there will be a shortfall. Such a scenario doesn’t augur well for the fiscal deficit.
In the near term, unless the finance minister follows up his speech with concrete action, it won’t take long for bond yields to rise again. Fresh supply is steadily coming, while an easing of liquidity pressures means an absence of open-market bond purchases.