Bond prices rose after Finance Minister Nirmala Sitharaman announced that the government could borrow from abroad in external currencies, a move that would ease pressure on the domestic market facing supply glut.
“India’s sovereign external debt to GDP is among the lowest globally at less than 5%. The Government would start raising a part of its gross borrowing programme in external markets in external currencies,” Ms. Sitharaman said in her maiden budget speech.
“This will also have beneficial impact on demand situation for the government securities in domestic market,” she said.
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Yields on 10-year government bonds which fell more than 15 BPS right after the announcement, reversed trend later and closed 6.69% as compared to previous close of 6.75%.
Apart from addressing supply issues in the domestic market, the move could also help to reduce borrowing costs for Indian companies.
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“While the government might actually borrow a small amount in line with its conservative external debt management practices, there could be significant externalities,” said Abheek Barua, Chief Economist, HDFC Bank.
“A sovereign bond issue would help set a clear benchmark for other external bond issuances and is likely to bring borrowing costs down across the board for Indian companies as well as increase the appetite for Indian debt paper,” Mr. Barua added.
The gross borrowing programme remaining unchanged has also cheered the bond markets. Bond market players appreciated the government’s resolve to stick to fiscal discipline.
“The fact that the gross government borrowing remains unchanged is an extremely positive move. The MPC has already moved into accommodative policy on rates front and with the government not breaching the line of fiscal discipline, it spells good news for bond markets,” said Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management Company. She expects further easing of bond yields.