10-year bond yield closes at over 22-month high, rupee weakens against US dollar
Mumbai: India’s 10-year bond yield on Thursday shot up by over 18 basis points to closed at over 22-month high while rupee weakened past 64 mark against US dollar after the government revised upward its fiscal deficit target for the fiscal year 2019 in the budget.
The 10-year bond yield rose to 7.605%, a level last seen on 11 March 2016, up 18 basis points from its Wednesday’s close of 7.43%. One basis point is one-hundredth of a percentage point. Bond yields and prices move in opposite directions.
The home currency closed at 64.03 per dollar, down 0.69% from its previous close of 63.59. The rupee opened at 63.70 per dollar and touched a low of 64.04 per dollar.
Finance minister Arun Jaitley in the budget revised his fiscal deficit target for 2018-19 to 3.3% of the gross domestic product (GDP) against the earlier target of 3%, after breaching the deficit target for 2017-18
While the budget estimate of fiscal deficit for 2017-18 was 3.2% of the GDP, the revised estimate is now 3.5% of the GDP, the same as 2016-17.
“The primary deficit (excluding one-off revenues) is modestly contractionary, which may be hard to attain given the political calendar. This will see fiscal policy play a smaller role in supporting growth, though well-implemented reforms towards the farm and rural sector might prove to be a tailwind to the consumption turnaround” said said Radhika Rao, economist at DBS Bank Ltd.
“Besides the modest miss in the fiscal targets, the bearish mood in the bond markets is also likely a reflection of the notable jump in G3 yields” Rao added.
Jaitley, unveiling the budget for the next fiscal year, pegged the government’s borrowing in the year at Rs6.06 trillion, compared to Rs6.05 trillion in the year to March 2018. The government also proposed that the corporate sector should raise at least one-fourth of their funding requirement through bonds which analyst expects may create oversupply of bonds.
“The crowding out effect due to issuances of more Corporate Bonds, especially increasing thirst on market borrowings by high rated large PSUs will exert pressure on Government bonds too as a substitution effect. I think yields to remain under pressure in absence of any positive trigger”, said Soumyajit Niyogi Associte Director India Ratings and Research.
“The market has already seen changes in borrowing number as opposed to commitment, now the fear of fiscal slippages will be more critical for the yields”, Niyogi added.
The BSE’s benchmark Sensex index fell 0.16% or 58.36 points, to 35,906.66. So far this year, the Sensex has risen 5.4%.
Since the beginning of this year, the rupee has fallen 0.24%, while foreign institutional investors have bought $2.08 billion of local equities and $1.35 billion of debt.
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