Sovereign bonds in India rallied after Finance Minister Nirmala Sitharaman said the government will borrow overseas to finance the budget deficit, a move that will ease pressure on local markets saturated with supply.
The administration also set the budget deficit target for the fiscal year at 3.3% of gross domestic product, lower than the 3.4% estimated in February’s interim plan. Yields on the benchmark 10-year debt dropped as much as 19 basis points, the most in six months, to its lowest in almost two years.
Prime Minister Narendra Modi faces shrinking options to raise funds as a slowing economy crimps tax revenue, while investors have been concerned about his plans to borrow a record 7.1 trillion rupees ($104 billion) this fiscal year, a target Sitharaman left unchanged.
“Besides broadening the bond market, I think this should ease some of the supply overhang on the domestic market and ease upward pressure on yields,” said Prakash Sakpal, an economist at ING Groep NV in Singapore. “Another goods news from the budget is that the government isn’t raising its borrowing plan.”
The yield on benchmark 10-year bonds dropped 9 basis points to 6.66%, while the rupee swung to a gain to trade 0.1% higher at 68.4450 per dollar. Yields have declined by more than 75 basis points since the end of April as the central bank cut rates thrice this year and continued to buy debt on the open market.
Following are comments from analysts and strategists:
Confidence in Economy
ICICI Bank (B. Prasanna, group head for global markets – sales, trading and research)
- The decision to issue a sovereign bond overseas reflects the Modi government’s confidence in the economy
- “It’s always good to be broad-based in your funds generation”
- Indications the government is staying with its borrowing and budget deficit path has also spurred a positive market outlook
FirstRand (Harihar Krishnamoorthy, treasurer)
- Once successfully established with investors, a global bond instrument will play a critical role in reducing local borrowing and alleviate the pressure on local liquidity
- A good pricing for bonds in global markets will have a trickle-down impact on the local rates too
Edelweiss Asset Management (Dhawal Dalal, chief investment officer – fixed income)
- Bonds are rallying as market participants are reacting positively to reports of FY20 gross borrowing amount remaining unchanged as well as prospects of FY20 fiscal deficit target of 3.3% of GDP
- Bond market is also enthused by the budget proposal of having a part of borrowings in global bond markets in various currencies
Timing is Key
Lakshmi Vilas Bank ( R.K. Gurumurthy, head of treasury)
- Pressure on domestic liquidity will be that much less as some part of the borrowings will be raised overseas. Indian rupee can gain a bit on the back of this development
- However most of today’s reactions could reverse as timing is key
- Bond yields were expected to test 6.50% and today’s low was close to that. Bias remains for softer yields this quarter