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Bond yields jump on deficit concern

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India’s bond market reacted sharply to the finance minister’s announcement of higher-than-expected fiscal deficit for the coming year and the corresponding borrowing burden on the market saw 10-year bond yields jump 11 basis points to close at 7.38 per cent. Net borrowing, after adjusting for repayments, is seen at Rs 4.48 lakh crore in FY20 almost unchanged from Rs 4.47 lakh crore as per the revised estimate for FY19. Gross borrowings were expected to be lower than Rs 7 lakh crore, but have been pegged at Rs 7.1 lakh crore, an increase of 24 per cent from Rs 5.71 lakh crore in FY19. While the slippage in fiscal deficit in FY19 from 3.3 per cent to 3.4 per cent was expected, the fiscal deficit figure of 3.4 per cent for FY20 came as a surprise. “The borrowing number is way beyond expectation because most people were expecting the fiscal deficit figure of 3.3 per cent for FY20,” said an economist, requesting anonymity. The high borrowing numbers pushed up the 10-year bond yields to 7.39 per cent on Friday against its previous close of 7.28 per cent. “The financing of pegged budget deficit appears to be through larger-than-expected market borrowing (net) for both FY19 and FY20.

The bond markets have reacted to this news adversely.

The bond yields have moved up by 11 bps from today’s lows,” said Shubhada Rao, Chief Economist, Yes Bank. In September 2018, the government had cut its gross borrowing for the year by Rs 70,000 crore and stuck to the net borrowings planned in the budget to meet the fiscal deficit target for the year and cool bond yields. There is an increase in repayments for FY20 at Rs 2.36 lakh crore compared with Rs 1.48 lakh crore in the current fiscal. “A 12 per cent rise in net borrowing by the government is likely to add pressure on bond yields but improved global liquidity scenario due to the US Fed’s dovishness will make bond yields move in a narrow band,” said India Ratings’ chief economist Devendra Kumar Pant.

“However, if there is fiscal slippage and growth slips or there is an upward trajectory of inflation, it may lead bond yields to spike,” Pant added.




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