India Bonds Drop Most in Seven Months on Higher Borrowing Target

India’s benchmark bonds dropped the most in seven months after the government announced a borrowing target that was higher than investors estimated. The rupee and stocks slumped.

Finance Minister Palaniappan Chidambaram projected gross market borrowing for the fiscal year through March 2014 at a record 6.29 trillion rupees ($115 billion), compared with 5.8 trillion estimated in a Bloomberg survey. Total expenditure will rise 16 percent from the current year to 16.7 trillion rupees, while the budget deficit will narrow to 4.8 percent of gross domestic product from 5.2 percent, according to the budget presented in parliament today.

“On the face of it, it seems tough to understand how the fiscal-deficit target will be achieved,” said Vikas Babu, a trader at state-run Andhra Bank in Mumbai.

The yield on the 8.15 percent notes due June 2022 rose seven basis points, or 0.07 percentage point, to 7.87 percent in Mumbai, according to the central bank’s trading system. This is the biggest jump in a 10-year yield since July 31 and the rate is the highest since Feb. 7.

The benchmark rate has dropped four basis points this month and 18 basis points this year.

Chidambaram imposed a 10 percent tax surcharge for one year on annual personal incomes above 10 million rupees and increased customs duties on yachts, high-end motorcycles and luxury cars. He raised the surcharge on some companies to 10 percent.

Super-Rich Taxed

The rupee declined 0.9 percent to 54.36 per dollar, according to data compiled by Bloomberg. It touched 53.6050 earlier, the strongest level since Feb. 8. The currency fell 2.1 percent this month, the most in Asia.

One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, rose 10 basis points to 9.60 percent.

“The thrust on expenditure cuts has been lower than expected and the tax increases on the super-rich individuals and corporates have dampened sentiment somewhat,” said Priyanka Kishore, a currency strategist at Standard Chartered Plc in Mumbai. “The rupee is likely to continue trading choppy in a 53-55 range” in the coming weeks, she said.

Three-month onshore rupee forwards traded at 55.45 per dollar, compared with 54.99 yesterday, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 55.44 versus 54.86. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

The S&P BSE Sensex fell 1.5 percent to 18,861.54, after rising as much as 0.9 percent before the budget statement. The gauge fell 5.2 percent in February, ending three months of advance and the steepest monthly slide since May.

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