Indian Bonds Drop on Speculation Government to Miss Deficit Goal

India’s 10-year bonds declined on speculation the government will exceed its fiscal deficit target, spurring more borrowings from the market.

Finance Minister Pranab Mukherjee aims to curb the fiscal deficit within 4.6 percent of gross domestic product in the fiscal year ending March. He has raised 11.44 billion rupees from asset sales this year, or 3 percent of the budget target, according to data provided by the Department of Disinvestment. Wholesale prices increased 7.47 percent in December, the least in two years, the commerce ministry said in a statement today.

“Bond yields are still vulnerable to rise although inflation is cooling,” said Nagaraj Kulkarni, a Mumbai-based fixed-income strategist at Standard Chartered Plc. “The key risk to bonds is from worsening fiscal situation, particularly if disinvestment target is not met.”

The yield on the 8.79 percent bonds due November 2021 rose three basis points, or 0.03 percentage point, to 8.22 percent in Mumbai, according to the central bank’s trading system.

Kulkarni forecasts the 10-year yield to touch 8.5 percent by the end of March. The shortfall between revenue and spending may be 5.6 percent of GDP in the current fiscal year, he said.

India boosted its annual debt-sales target by 8.5 percent last month to a record 5.1 trillion rupees.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, rose eight basis points to 7.95 percent, according to data compiled by Bloomberg.

To contact the reporter on this story: V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

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