Indian Bonds Decline as Wage Rise Seen Threatening Deficit Plan

  • Panel recommends 23.55% salary rise for federal employees
  • Government aims to cut budget deficit to 3.5% of GDP next year

Indian sovereign bonds posted the biggest weekly decline this month as a proposed wage increase for federal employees raised concern the government may miss its fiscal-deficit target.

A panel appointed by the Finance Ministry recommended a 23.55 percent increase in the salaries and allowances of state employees on Thursday, which would impose a cost of 1.02 trillion rupees ($15.4 billion) to next year’s budget. That could derail Finance Minister Arun Jaitley’s plan to curb the shortfall to 3.5 percent of gross domestic product in the year though March 2017, from a goal of 3.9 percent this year.

“The bond market is really worried about the impact on the fiscal deficit,” said Badrish Kulhalli, a fixed-income fund manager at HDFC Standard Life Insurance Co. in Mumbai. “The increased pressure of higher wages will make it difficult for the government to manage the deficit if growth and tax revenues are unable to keep pace.”

The yield on government notes due May 2025 climbed five basis points from Nov. 13, the most since the week ended Oct. 30, to 7.70 percent in Mumbai, according to prices from the central bank’s trading system. It rose three basis points on Friday.

The government is confident of sticking to its fiscal deficit road map, Shaktikanta Das, economic affairs secretary, said in an interview with Bloomberg TV India on Friday. The administration aims to shrink the shortfall to 3 percent of GDP in the year through March 2018.

The rupee fell 0.2 percent this week to 66.1950 a dollar, prices from local banks compiled by Bloomberg show. The currency was little changed on Friday.

India sold 150 billion rupees of sovereign bonds at an auction on Friday, according to a central bank statement.

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