Indian Bonds Snap Two-Day Gain on Deficit Concern; Rupee Drops

India’s 10-year bonds snapped a two-day gain on concern the government’s budget deficit will exceed its goal as an economic slowdown erodes revenue. The rupee declined.

The shortfall was 5.09 trillion rupees ($82 billion) in the April-November period, or about 94 percent of the target for the year ending March 31, official data showed yesterday. India’s economy will grow 5 percent this fiscal year, the central bank forecasts, matching the previous period’s growth that was the least since 2002-2003. The gap in public finances has put the nation’s debt rating at risk, with Standard & Poor’s saying in September that there’s a more than one-in-three probability of a downgrade within two years.

“The central government’s fiscal situation remains gloomy, with high deficits in the eight months ending November and a challenging revenue outlook,” Aditi Nayar, a senior economist at ICRA Ltd., the local unit of Moody’s Investors Service, wrote in a note. “Some restriction of productive expenditure seems necessary” to curb the deficit, she wrote.

The yield on the 8.83 percent sovereign notes due November 2023 rose three basis points, or 0.03 percentage points, to 8.85 percent in Mumbai, according to prices from the central bank’s trading system. The rupee weakened 0.2 percent to 61.9050 per dollar, according to prices from local banks compiled by Bloomberg.

Finance Minister Palaniappan Chidambaram has pledged to cut the budget gap to a six-year low of 4.8 percent of gross domestic product this fiscal year, from 4.9 percent in the previous 12 months.

Annual Loss

Ten-year government bonds completed their biggest annual loss since 2009 yesterday, with yields surging 77 basis points, as foreign investors cut holdings of local notes by about $8 billion in 2013 before the U.S. starts tapering stimulus. The rupee capped a third straight year of losses, weakening 11 percent in the second-worst performance among Asian currencies excluding the Japanese yen.

India’s current-account deficit will narrow to less than 3 percent of GDP in the year through March 2014, Reserve Bank of India Governor Raghuram Rajan said last month, from an unprecedented 4.8 percent in the previous year.

One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, rose one basis point today to 10.21 percent. Three-month offshore non-deliverable forwards fell 0.1 percent to 63.11 per dollar, data compiled by Bloomberg show. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

India’s one-year interest-rate swap, a derivative contract used to guard against swings in funding costs, was unchanged at 8.47 percent, data compiled by Bloomberg show. It climbed 86 basis points last year, the most since 2010.

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