Bloomberg News

India 10-Year Bond Yield Jumps to 3-Year High on Borrowing Plan

October 03, 2011

Oct. 3 (Bloomberg) -- India’s 10-year bonds fell for a fifth day, pushing yields to a three-year high, after the government said it will sell 32 percent more debt in the next six months than previously planned.

The notes extended five quarters of declines after the finance ministry said on Sept. 29 it will borrow 2.2 trillion rupees ($45 billion) by March, compared with an earlier target for 1.67 trillion rupees. The market was shut Sept. 30 as banks were closing half-yearly accounts. Increasing debt sales means the nation will miss a target to cut the budget deficit to 4.6 percent of gross domestic product, according to Fitch Ratings.

Bond yields “are likely to remain elevated over the next few months owing to increased government bond issuance,” Atsi Sheth, senior analyst at Moody’s Investors Service Inc., wrote in a report published today. “In combination with a likely widening of the budget deficit over the course of the year, it suggests a slower path to fiscal consolidation.”

The yield on the 7.8 percent securities due April 2021 rose nine basis points, or 0.09 percentage point, to 8.54 percent at the 5 p.m. close in Mumbai, according to the central bank’s trading system. That is the highest level for benchmark 10-year rates since September 2008, according to data compiled by Bloomberg.

The government’s shortfall may increase to 5.5 percent in the fiscal year through March from 4.7 percent in the previous 12 months, said Andrew Colquhoun, Hong Kong-based head of Asia- Pacific sovereign ratings at Fitch. The ratings company today said that any further deterioration in government finances may “weigh” on India’s debt ratings, even though last week’s decision to increase the annual borrowing plan was expected.

Fiscal Outlook

“We already expected the 4.6 percent deficit target to be missed but if we saw further weakening in the fiscal outlook, then that would weigh on the ratings,” said Colquhoun. “We still think the debt-to-GDP ratio will be coming down because of the strength of the nominal GDP growth. The announcement of extra borrowing is what we would’ve expected to happen.”

India’s decision to issue more debt is “not surprising” and is “within the scope of expectations,” said Takahira Ogawa, Singapore-based director of sovereign and international public finance ratings at Standard & Poor’s. The nation’s budget deficit in the fiscal year ending March 31 will be wider than the government’s estimate of a four-year low of 4.6 percent, he said in an e-mail today.

“To maintain the market’s confidence, it is becoming more important for the government to show its commitment to fiscal consolidation in the medium term,” Ogawa said. “The content and timing of enactment of next year’s budget will be very important factors for India’s sovereign rating.”

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, rose 12 basis points to 7.91 percent, according to data compiled by Bloomberg.

--Editor: Anil Varma

To contact the reporters on this story: Jeanette Rodrigues in Mumbai at

To contact the editor responsible for this story: Sandy Hendry at

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