The yield on government bonds fell sharply on Monday — the first trading session after the Union Budget presentation on Saturday — as the government avoided extra borrowing and also opened certain government securities for non-resident investors.
The yield on 10-year benchmark government bonds closed the day at 6.51%, down 10 bps from its previous close on Friday.
Bond markets were closed on Saturday. Despite missing the target for fiscal deficit of 3.3% for FY19, and projecting a fiscal deficit target of 3.5% for the next financial year, the gross borrowing programme of the government was retained at ₹7.1 lakh crore for the current financial year. Gross borrowing for the next year is pegged at ₹7.8 lakh crore which is in line with market expectations.
The fiscal deficit for FY19 will be 3.8% of the GDP, Finance Minister Nirmala Sitharaman had said in her Budget speech. “The Budget delivered credible numbers in terms of its fiscal deficit estimates, raising the deficit by 50 basis points (bps) this year and the next. The Budget used up the 0.5% GDP leeway provided by the FRBM, instead of sticking to the fiscal consolidation path that laid out a target of 3% for FY20-21,” Abheek Barua, Chief Economist, HDFC Bank, said.
“We expect the 10-year G-Sec to trade between 6.5%-6.6% in the short run as markets are likely to get some relief in terms of no additional borrowings this year and in line with expectations [on the] borrowing target for next year,” Mr. Barua added. Though bond yields are expected remain range bound, market participants ruled out the possibility of any further rate reduction. This is because higher fiscal deficit may push up headline inflation, which is already high due to a spike in food prices.
Status quo likely
The RBI is expected to maintain status quo in the sixth bimonthly monetary policy review, which will be announced on Thursday.
“With fiscal policy taking a growth-supportive role, on the back of the monetary policy being ahead of the curve last year, the calibrated policy mix should bode well for growth. We look for the central bank to remain on an extended pause on rates [even as supply-induced shocks dissipate] but maintain an accommodative bias to ensure the cost of capital remains stable and favourable,” said Radhika Rao, senior vice-president and economist, DBS Group Research.
After reducing the interest rate by 135 bps between February and October, the RBI decided, in December, to keep the rate unchanged, citing inflation concerns.
