Indian Bonds Advance for a Third Day on Budget-Deficit Optimism

India’s 10-year bonds rose for a third day after the government sought to reduce next year’s fiscal deficit and contain this year’s shortfall within the official target.

The gap will narrow to 4.1 percent of gross domestic product in the year ending March 2015, Finance Minister Palaniappan Chidambaram said while presenting an interim budget in New Delhi yesterday to cover spending until Prime Minister Manmohan Singh’s administration’s term ends. He estimated this year’s deficit will be 4.6 percent of GDP, compared with a targeted 4.8 percent. A full-fledged budget will be presented by the new government after elections due by May.

The yield on the 8.83 percent sovereign bonds due November 2023 slid four basis points, or 0.04 percentage points, to 8.77 percent in Mumbai, prices from the central bank’s trading system show. The yield has fallen 10 basis points in three days. Markets will be shut tomorrow for a local holiday.

“The government sticking to its deficit target for a second straight year is certainly positive,” said Harihar Krishnamoorthy, treasurer at the Indian unit of FirstRand Ltd. in Mumbai. “The budget has been a positive surprise as the borrowing numbers are lower than what some corners of the market were expecting.”

Chidambaram announced gross borrowing of 5.97 trillion rupees ($96 billion) for the year starting April 1 from a revised 5.64 trillion rupees for the current period. The government had estimated gross borrowing at 6.29 trillion rupees for the current fiscal year in the last budget. Net borrowing for next year is estimated at 4.57 trillion rupees.

No Surprise

“While it can be debated whether such a lower level of market borrowing would eventually be adhered to in fiscal year 2014-15, the April-September 2014 borrowing will likely remain based on projections and, thus, refrain from causing any near-term negative surprise for the market,” Barclays Plc economists Siddhartha Sanyal in Mumbai and Rahul Bajoria in Singapore wrote in a note today.

One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, lost five basis points to 8.67 percent, data compiled by Bloomberg show.

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