Bond yield rises on government borrowing plan, rupee weakens against US dollar

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Mumbai: The benchmark government 10-year bond yield spiked further on Thursday after the government announced an additional Rs50,000 crore in borrowings via bonds to fund its fiscal deficit. Meanwhile, the rupee weakened against the US dollar for the third session.

The 10-year bond yield opened at 7.250% and touched a high of 7.326%, a level last seen on 12 July 2016. At 9.15am, it rose to 7.313% from its Wednesday’s close of 7.219%. So far this year, bond yield has surged over 120 basis points.

Brokerage firm Kotak Institutional Equities has revised its fourth quarter 2018 range for the 10-year yield to 7.15-7.40% from 6.9-7.1% earlier.

“Going ahead, we continue to believe that India rates look set to remain on the upside in FY2019. The floor will be set with the end of RBI’s rate-cut cycle and expectations of a possible start to a rate-hike cycle. Other factors like tightening domestic liquidity, concerns on quality of fiscal consolidation, and gradual global policy normalization etc. will ensure that the yield may directionally remain on the upside in FY2019,” the Kotak report said.

The move comes after the goods and services tax (GST) data for December showed a slide in revenue receipts. By expanding its market borrowing programme, analysts believe this signals that the government may breach its fiscal deficit target of 3.2% of gross domestic product (GDP).

This may force finance minister Arun Jaitley to recalibrate his fiscal consolidation roadmap of achieving a fiscal deficit of 3% of GDP by 2018-19.

“Rise in market borrowings is coming at a time when appetite from investors have lessened and other factors have turned wobbly especially global yields. Now investors will be more concerned about next year’s supply,” said Soumyajit Niyogi, associate director, India Ratings and Research.

GST collection in November fell further to Rs80,808 crore from Rs83,346 crore in October, according to official data released on Tuesday. The government collected Rs92,283 crore in July, Rs90,669 crore in August, and Rs92,150 crore in September. The fall in collection was due to reduction in taxes of over 175 items last month.

Earlier, the government had taken approval from Parliament for extra spending of Rs33,380 crore.

Traders are already concerned due to surge in international crude oil prices, which may lead to higher inflation and may give less space to the Reserve Bank of India to cut rates.

Also, after a slim poll victory for Prime Minister Narendra Modi in Gujarat and Himachal Pradesh assembly election, analysts expect that his administration will resort to populist measures in the next budget to woo voters ahead of the 2019 election.

The Indian rupee weakened for the third session against the US dollar. The rupee opened at 64.13. At 9.15am, the home currency was trading at 64.24 a dollar, down 0.14% from its previous close of 64.16.

The benchmark Sensex rose 0.05%, or 17.05 points, to 33,928.86. So far this year, it has gained 28%.

So far this year, the rupee has gained 5.8%, while foreign institutional investors have bought $7.71 billion and $22.83 billion in equity and debt, respectively.