Fixed income market wary about government borrowing spike

NEW DELHI: Investors in fixed income securities are on the edge as the finance ministry left the door open for any possible rise in borrowing in the second half of the fiscal though the government stuck to its second half calendar on Thursday.

The 10-year bond yield hardened as much as six basis points to 6.7%, but eased to end at 6.66% as dealers were unsure of whether the government will increase borrowing as also on expectations that the Reserve Bank of India (RBI) will leave interest rates unchanged when the monetary policy committee announces its decision on Wednesday. One basis point is 0.01 percentage point.

“Any fiscal slippage has a direct impact on the supply of bonds, monetary policy and also hits chances of a rating upgrade. All these fears are on the back of the mind of traders because of which yields are treading higher.However, the government has been clear that it will stick to its borrowing plan in the second half and keep fiscal deficit at 3.2%. There are various moving parts, so even though the risk of higher borrowing is real, it is not yet clear or present,“ said Sandeep Bagla, associate director, Trust Capital.

On Thursday, the finance ministry said India will borrow Rs 2.08 lakh crore from the bond market, which is in line with the target laid out in the budget. However, economic affairs secretary Subash Garg said the government is not ruling out borrowing more. “I am not ruling out at all,“ he said when asked if the government would go for additional borrowing. “If there is any need, then we may.“

Separately, an agency report said that the government will borrow as much as Rs 1 lakh crore over and above the borrowing calendar from the market.

“There was news today which lead to a selloff in the government bond market. But I still think that we should give more weight to the government’s offi cial statement which clearly says that the borrowing will be within what is budgeted,“ said Baby KP, treasurer at Federal Bank.

On Thursday , the government also increased the limits for foreign ownership on bond holdings in both the central government securities and state development loans.But the new limit comes even as the rupee is trading near six-month lows which means foreign investors will likely wait and watch before putting more money here.

“The fundamentals of the economy have not changed but the rupee weakness means that investors may lose money on the currency even though they may gain on the yield. I think there will be interest but that will come a few days down the line. Investors, both foreign and Indian are in a wait and watch mode now,“ said Harihar Krishnamoorthy, treasury head at FirstRand Bank.

The new limit totalling Rs 4,000 crore includes Rs 8,000 crore for central government bonds and Rs 6,200 crore for state develop` ment loans, which will kick-in in October and be valid until December 2017.

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