Indian Bonds Complete Weekly Decline on Fiscal Deficit Concern

India’s 10-year sovereign bonds completed a weekly decline on concern the government will struggle to meet its budget-deficit target and borrow more to bridge the shortfall.

A proposed increase in salaries of millions of civil servants and a plan to clear the debts piling up at power distribution companies threaten Finance Minister Arun Jaitley’s goal of fiscal consolidation. The government may have to reassess its fiscal projections for the year starting April 1, the Finance Ministry said in a review published Friday. The rupee was set for a second weekly gain.

The yield on sovereign notes due May 2025 rose two basis points from Dec. 18 to 7.75 percent in Mumbai, according to prices from the central bank’s trading system. It fell one basis point on Wednesday. Indian bond and currency markets will be shut on Thursday and Friday for local holidays.

“The fiscal arithmetic of the government isn’t clear at the moment,” said Soumyajit Niyogi, an interest-rate strategist at SBI DFHI Ltd. in Mumbai. “Considering it accepts the wage increase recommendations, market borrowing could increase by as much as 500 billion rupees.”

The government estimates gross borrowing of 6 trillion rupees ($90.6 billion) in the year ending March 31. While steps to boost taxes will help it reach the deficit target of 3.9 percent of gross domestic product in this period, the 3.5 percent goal for the 12 months ending March 2017 could be pressured by an expected increase in state salaries and higher military pensions, according to Friday’s mid-year report.

India’s government plans to buy back as much as 200 billion rupees of bonds within two weeks using its surplus cash pile, according to people familiar with the matter.

The rupee strengthened 0.3 percent this week to 66.21 a dollar, prices from local banks compiled by Bloomberg show. It rose 0.2 percent on Wednesday.

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