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The total gross borrowing of the government from the bond market was pegged at `6 trillion. Photo: Aniruddha Chowdhury/Mint
The total gross borrowing of the government from the bond market was pegged at `6 trillion. Photo: Aniruddha Chowdhury/Mint

Bond yields decline marginally after Jaitley keeps deficit target

A section of the bond market had feared that the government may peg the deficit higher at around 4% and also announce a higher borrowing amount

Mumbai: Bond yields dropped marginally after the government on Monday pegged the fiscal deficit target for 2016-17 at 3.5% of gross domestic product in the Union Budget and retained that of 2015-16 at 3.9%, indicating that it will not deviate from its stated fiscal consolidation path.

The total gross borrowing of the government from the bond market was pegged at 6 trillion.

It is prudent to stick to the fiscal consolidation path, said finance minister Arun Jaitley in his budget speech.

A section of the bond market had feared that the government may peg the deficit higher at around 4% and also announce a higher borrowing amount.

Markets had expected an increase of 13% in the government’s gross market borrowing to 6.8 trillion, according to a Bloomberg survey of 10 fixed-income strategists and economists.

“The fiscal deficit at 3.5% is positive and the gross borrowing of 6 lakh crore is much less than what market was fearing. However, assumptions on revenue growth and disinvestment will still have to be analysed," said B. Prasanna, managing director and chief executive officer at ICICI Securities and Primary Dealership.

The government borrowed 6 trillion from the bond market in fiscal 2016 on a gross basis.

The yield on the benchmark 10-year government bond at 7.59%, 2026 was down by six basis points to 7.69% after the announcement of the fiscal deficit numbers. The bond was trading around 7.75% before the Budget speech began. One basis point is 0.01%.

The 7.72%, 2025 bond yield dropped by a bigger margin to 7.90% from 7.99% level before the budget.

Budget announcements are key in determining the extent of bond supply to the market as well as further rate cuts by the Reserve Bank of India (RBI). Room for further reductions in the policy rate will depend on whether the government sticks to its fiscal consolidation path, the RBI had said in its bi-monthly monetary policy on 2 February.

Governor Raghuram Rajan recently said the budget will be seen in its entirety and not just only the fiscal deficit numbers.

Foreign portfolio investors’ (FPIs) holdings of all rupee-denominated debt have fallen 7,020 crore in February and is set for the biggest monthly slide since April 2014, data from depositories show. Within this, FPIs’ holdings in government bonds has fallen by 3,751 crore.

Bond yields have already risen by 25 basis points this fiscal even though the RBI pared policy rates by a cumulative 125 bps during 2015. A part of this rise has been attributed to the huge supply of bonds under the government’s market borrowing. The additional supply came through state development loans (SDL) which has also risen by 35% in fiscal 2016 to about 3 trillion.

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