India Bond Yields Down This Week; Investors Await Federal Budget

Friday,   22-Jan-2021   05:10 PM (IST)

Indian federal government bond yields ended lower this week after New Delhi sold lesser quantum of bonds, while traders now await the federal budget amid expectations that borrowing may remain elevated. The benchmark 5.77% bond maturing in 2030 ended at 98.77 rupees, yielding 5.94%, against 98.65 rupees and 5.96% yesterday. The yield fell five basis points this week, after rising 10 basis points last week. The central bank today did not accept any bid for 5.85% 2030 bond, second such instance in the last three auctions of this paper, leading to a rally in late session. New Delhi today sold bonds worth 209.20 billion rupees against target of 270 billion rupees, while the Reserve Bank of India devolved bulk of the five-year bond on primary dealers. India’s Finance Minister Nirmala Sitharaman, who will present the budget for the next fiscal year on Feb. 1, is expected to announce measures to aid the ongoing revival of the pandemic-hit economy. Asia’s third-largest economy entered a recession for the first time in over two decades and is expected to post its deepest-ever contraction in the fiscal year ending Mar. 31. New Delhi will borrow 10.50 trillion rupees ($144 billion) through bonds in the next fiscal year to fund its budget deficit, according to a NewsRise poll of 15 market participants. The bond sales will be lower than the record borrowing of 12 trillion rupees this year. New Delhi had targeted a budget gap of 3.5% of gross domestic product for the current fiscal year but the deficit is expected to widen. In 2020, the central bank did most of the heavy lifting as economic activities came to a halt during the stringent months-long lockdown. The Reserve Bank of India slashed policy rates to record lows, pumped liquidity into banks and conducted hefty open market operations to support government fund-raising. Bond traders expect the central bank to continue to smoothen the supply in the months ahead as the economic and fiscal outlook remains uncertain. Meanwhile, the Reserve Bank of India has started to restore pre-pandemic liquidity operations in phases. Last week, it conducted a 14-day reverse repo where banks parked 2 trillion rupees. Further monetary space could open up in India if inflation continues to inch towards the target, RBI staff said in an article earlier this week. The rate-setting panel’s next decision is due on Feb. 5. The benchmark Brent crude oil contract fell 1.6% this week to $55.10 per barrel. India imports nearly 85% of its crude oil requirements. The Indian rupee was at 72.98 to the dollar, up 0.1% this week.