MUMBAI: The yield on the 10-year bond on Monday surged 26 basis points--the most in three years--following the government's announcement of higher borrowing.
At 1010 am, the yield on the 10-year bond was at 6.222%, up from its previous close of 5.971%.
Late on Friday, the Centre said it will borrow ₹12 trillion in the current fiscal, 54% more than budgeted. Half of this will be raised by the end of September. The increase in borrowing signals a major slippage in fiscal deficit amid rising pressures on both revenue and expenditure because of the covid-19 pandemic.
"This has been necessitated because of the imminent need to deliver an appropriate fiscal package to address the looming covid-19- related slowdown", sad Centrum Economic research in a 10 May note.
The enhanced borrowings provide the government much needed flexibility on compensating it for the expected shortfall in tax and non-tax revenue while dispensing some quantum of instantly required fiscal stimulus to provide cushion to the faltering economic activity and subsequently finance its fiscal deficit.
Brokerage firm Nomura Research estimates India’s budget deficit will widen to 7% of gross domestic product versus the 3.5% target, with output shrinking 5.2%. The brokerage firm also sharply cut its projection for real GDP growth in FY21 to -5.2% year-on-year from -0.4%. They now expect year-on-year growth to remain negative for three consecutive quarters.
According to Radhika Rao, economist at DBS Bank, a jump in borrowings points to an increase in the Centre’s deficit target from budgeted -3.5% of GDP to at least -5.5%. This might deteriorate further as spending rises and growth slows (vs budgeted nominal GDP at 10%). Besides borrowings, the govrenment has also increased fuel excise duties on diesel and petrol, with the latest increase taking taxes to 260% of the petrol base price and 255% in the case of diesel.
Weaker demand for fuel due to slowing industrial and household activity will, however, impinge on the incremental revenues anticipated from this increase, Rao added.
"We expect the borrowing calendar announcement to result in some short-term pressure on bonds and swaps, which could be sustained in the absence of an announcement of OMO purchases/operation twist from the RBI. However, we do not expect the RBI to stay on the sidelines and expect further operations imminently", said Nomura Reserach in a note to its investors.
"We remain long on 10y IGBs (old benchmark), and see a number of additional supportive local factors including flush banking system liquidity and scope for increased demand from banks, continued “safe-haven" buying from other local investors and expectations of further RBI policy rate cuts", Nomura note added