Indian Bonds Rally Most in Nine Months on Budget Deficit Plan

  • Government retains FY17 budget deficit goal of 3.5 percent
  • Ten-year yield slides 12 basis points, rupee reverses drop

Indian sovereign bonds rallied, driving the 10-year yield down by the most since May, after Prime Minister Narendra Modi’s government retained a plan to narrow the fiscal deficit in the federal budget.

The administration stuck to its target of bringing the shortfall to 3.5 percent of the gross domestic product in the year that starts April 1. The gap will be 3.9 percent of GDP in the current fiscal year, as projected, Finance Minister Arun Jaitley told lawmakers Monday. He announced gross market borrowings of 6 trillion rupees ($87.6 billion). The rupee reversed a decline.

“Markets are quite pleased with the deficit targets and the borrowing numbers look manageable,” said Ajay Manglunia, Mumbai-based head of fixed income at Edelweiss Financial Services Ltd. “This will pave the way for more central bank rate cuts and that will lower the yields further.”

The yield on notes due January 2026 slumped 12 basis points to 7.66 percent as of 1:56 p.m. in Mumbai, prices from the Reserve Bank of India’s trading system show. That’s the biggest decline in yield for 10-year benchmark debt since May 26. It fell to as low as 7.63 percent earlier.

The rupee rose 0.2 percent to 68.5125 a dollar, according to prices from local banks compiled by Bloomberg. It fell to as low as 68.7450 earlier, hovering near an unprecedented 68.845 seen in August 2013.

‘Underscoring Commitment’

A Bloomberg survey of 10 fixed-income strategists and economists last week estimated gross borrowings for the year starting April 1 to be at 6.8 trillion rupees. The deficit target was seen being raised to 3.7 percent from 3.5 percent.

“Different schools of thought have argued either in favor of fiscal consolidation and stability or for less aggressive consolidation and for boosting growth,” Jaitley said in his budget speech. “I have made the policy option and decided that prudence lies in adhering to fiscal targets.”

That “underscores a commitment to continuing along the path of fiscal consolidation,” Atsi Sheth, an analyst at Moody’s Investors Service in Singapore, wrote in e-mailed comments.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE