Bloomberg News

India 10-Year Bond Yields Rise on Concern Over Fiscal Deficit

November 09, 2011

Nov. 9 (Bloomberg) -- India’s 10-year bond yields rose on concern the sale of special bills used to meet temporary mismatches in cash flow signals the government’s fiscal situation is worsening.

The finance ministry raised 50 billion rupees ($997 million) by selling 42-day cash-management bills today, compared with a target of 90 billion rupees, the central bank said in a statement. It sold 60 billion rupees of similar-maturity cash- management bills yesterday. Finance Minister Pranab Mukherjee said last month it will be a “challenge” to narrow the government’s budget deficit to 4.6 percent of gross domestic product in the fiscal year through March.

“The cash-management bill sale probably shows the government’s fiscal scenario is pretty bad,” said Anoop Verma, a fixed-income trader at Development Credit Bank in Mumbai. “The deficit may overshoot the aim and trigger more borrowings.”

The yield on the 8.79 percent security due November 2021 climbed five basis points, or 0.05 percentage point, to 8.91 percent in Mumbai, according to the central bank’s trading system.

India will review its budget-deficit target for the fiscal year through March, a finance ministry official said as slowing economic growth hurts tax revenue.

“We will review the deficit target when we present the mid-year economic review to parliament in December,” R. Gopalan, secretary of economic affairs in the finance ministry, said today.

Fiscal Slippage

A higher deficit “is likely to maintain an upward pressure on bond yields,” said Nagaraj Kulkarni, a Mumbai-based fixed- income strategist at Standard Chartered Plc. “There is a high possibility of fiscal slippage this year.” He expects the deficit to widen to 5.4 percent of GDP by March 31.

India’s budget deficit in the six months through September was 68 percent of the annual goal, according to a report by the Controller General of Accounts. Revenue collections were 38.7 percent of the full year target in the six months through September compared with 58.4 percent of the annual target in the same period last year, the report showed.

India’s economy may grow 7.6 percent this fiscal year, the Reserve Bank of India said last month, reducing its estimate from 8 percent predicted earlier.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, fell three basis points to 8.26 percent, according to data compiled by Bloomberg.

--Editors: Abhay Singh, Sam Nagarajan

To contact the reporter on this story: V Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net


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