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How the bond market has upset govt's fiscal math

By Anup Roy
April 12, 2018 16:13 IST
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For current financial year, govt plans to borrow Rs 2.88 trillion in the first half of 2018-19, out of Rs 6.05 trillion planned for entire year

The bond market seems to have caught everyone by surprise once again.

The 10-year bond yield closed at 7.54 per cent on Wednesday, rising steadily from its monetary policy day level of 7.13 per cent.


The following day, the Reserve Bank of India (RBI) had said foreign portfolio investors could buy up to 1 percentage point more in government bonds, but in two stages, in 2018-19.

The rise in the limit was less than what the market expected.

While yields were firming up, the indicative calendar for state development loans came as a shock to the bond market.

The calendar showed states would be borrowing Rs 1.15-1.28 trillion in the first quarter, way higher than the usual borrowing plan of Rs 70,000 crore.

The SDL borrowing in the first week of the fiscal year was close to Rs 20,000 crore.

Oversupply of bonds clearly has dampened the appetite of struggling bond investors, dealers say. Rising crude oil prices could further disrupt the government’s fiscal deficit calculation.

Oil prices rose to $71 a barrel, a four-year high.

Furthermore, Russia is in talks with other major oil producing nations to keep oil prices at $80 a barrel for a long period.

This will put pressure on a major oil importer like India. The country’s 70 per cent of the import is oil.

If oil prices rise, the fiscal deficit would widen and the government will have to bridge the gap through increased market borrowing.

For the current financial year, the government plans to borrow Rs 2.88 trillion in the first half of 2018-19, out of Rs 6.05 trillion planned for the entire year.

Now there are indications that oil prices may spike further as Russia and the US both talk of missile attacks over Syria.

China and the US are already engaged in a trade-tariff war and China has indicated it may go for currency devaluation.

“The market is very fragile. The demand-supply mechanism is not working and there is no long-term support indicated.

"Even as the RBI allowed spreading of mark-to-market losses over four quarters, and the first half borrowing came lower than expected, SDL borrowing calendar and low FPI limit increase have spoiled the mood,” said a senior bond dealer with a private sector bank.

“There is no directional view about bonds. Some profit booking has happened, but it looks like even if the yield falls to 7.25-7.30 per cent level, some banks would book profit.

"This was not the case earlier, when talks were that the yield would hit 7 per cent,” said another private bank bond dealer.

The rapid rise in yields this week has virtually wiped off the entire gain that investors enjoyed after the announcement of first-half borrowing.

In the December quarter, banks had recorded at least Rs 15,000 crore in MTM losses, but the March quarter was better.

However, if the situation continues like this, it would be a difficult period for bond dealers.

“Most of the positive news around bonds were cosmetic, which sooner or later would have nullified anyway,” said Soumyajit Niyogi, associate director of India Ratings and Research.

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Anup Roy in Mumbai
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