Govt borrowing plan weighs on debt funds

Govt borrowing plan weighs on debt funds

The Indian fixed income market registered negative returns in July as higher government borrowings and burgeoning fiscal deficit weighed on investor sentiments.

The yield on the 6.9% 10-year government bond maturing in 2019, rose to 7% in July, from 6.8% in the previous month. The government plans to borrow Rs4.51 trillion for fiscal year 2009-10 to bridge its alarming fiscal deficit, which is expected to widen to 6.8% of gross domestic product (GDP), its highest in 16 years.

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The Reserve Bank of India (RBI), in its first quarterly review of monetary policy for FY10, indicated a change in stance on interest rates from dovish to neutral on possible inflation concerns.

The central bank further stated that it would continue to adopt accommodative monetary stance until there are definite and robust signs of recovery. RBI revised its GDP growth forecast as well as inflation forecast upwards to 6% and 5%, respectively, from previous estimates.

During the month, the headline inflation, as measured by the Wholesale Price Index, fell to -1.54% for the week ended 18 July, from -1.17% in the previous week.

Graphics by Paras Jain / Mint