India’s Government Bond Yields Near 31-Month Low Before Budget

The yield on India’s bonds due 2022 was near a 31-month low on optimism Finance Minister Palaniappan Chidambaram will announce steps today to cut the budget deficit.

The government will seek to narrow its shortfall to 4.8 percent of gross domestic product the next fiscal year, from an estimated 5.3 percent in the 12 months through March, according to a Bloomberg survey. The central bank has said that federal spending exceeding revenue fuels inflation, reducing room to lower borrowing costs and spur the economy. The Reserve Bank of India last cut its repurchase rate by 25 basis points to 7.75 percent in January, the first reduction in nine months, as the pace of price increases declined to a three-year low.

“The outlook for bonds is broadly positive,” said N.S. Venkatesh, Mumbai-based head of treasury at state-run IDBI Bank Ltd. “A commitment to reduce the deficit will provide scope for more monetary easing to revive growth.”

The yield on the 8.15 percent notes due June 2022 was at 7.80 percent as of 9:14 a.m. in Mumbai, according to the central bank’s trading system. It touched 7.78 percent earlier, the lowest level since July 2010. The rate has dropped 11 basis points this month and 25 basis points this year.

Chidambaram will aim for the smallest increase in annual debt sales in three years as he boosts efforts to avert a junk rating, according to the Bloomberg survey. The borrowing target for the year starting April 1 will be set at a record 5.8 trillion rupees ($108 billion), up 4 percent from the preceding period, according to the median estimate of 16 analysts and investors.

Rating Outlook

The government has reduced subsidies on diesel to rein in spending and raised more than $4 billion in asset sales after Standard & Poor’s and Fitch Ratings cut their credit outlooks for India last year, citing its failure to narrow budget and current-account deficits. Both companies rank the country at BBB-, the lowest investment grade.

Asia’s third-largest economy will grow 5 percent this fiscal year, the slowest pace in a decade, the Central Statistical Office said predicted on Feb. 7.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, was little changed at 7.61 percent, data compiled by Bloomberg show.

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