India Bond Yields at Three-Week High on Rating Downgrade Concern

India’s benchmark bonds dropped, sending yields to the highest level in more than three weeks, on concern slowing growth will hamper government’s efforts to cut the fiscal deficit and spur a ratings downgrade.

Finance Minister Palaniappan Chidambaram, unveiling the budget yesterday for the year starting April 1, said the government will cut the shortfall to 4.8 percent of gross domestic product from 5.3 percent. Asia’s third-largest economy grew 4.5 percent in the three months ended Dec. 31 from a year earlier, the weakest pace in almost four years, a government statement showed yesterday. Fitch Ratings today reiterated India’s lowest investment-grade rating with a negative outlook.

“Investors are worried about the possibility of ratings downgrade as the budget targets are ambitious with no concrete steps to boost growth,” said Indranil Pan, Mumbai-based chief economist at Kotak Mahindra Bank Ltd. “Large debt supplies are also ahead of us starting next month.”

The yield on the 8.15 percent notes due June 2022 rose three basis points, or 0.03 percentage point, to 7.91 percent in Mumbai, according to the central bank’s trading system. The rate rose 11 basis points this week.

The yield jumped the most in seven months yesterday as 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.

S&P and Fitch Ratings cut their credit outlooks for the nation last year, citing its failure to cut the budget and current-account deficits. Both companies rank the country at BBB-, the lowest investment grade.

“When we put India on negative outlook in June, we were quite clear in saying the outlook implies a more than likely chance of a downgrade and we need time to assess the situation.” said Art Woo, Hong Kong-based director of sovereign ratings at Fitch in a phone interview. “Nothing’s really changed from our point of view.”

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, was little changed today and this week at 7.63 percent, according to data compiled by Bloomberg.

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