“The worries about the fiscal overhang are so deep that it has upset optimism created by the Reserve Bank of India’s easing,” said Mahendra Jajoo, head of fixed income at Mirae Asset Global Investments Co. in Mumbai. Tax cuts have reignited worries about the breach of deficit targets, he added.
Sentiment toward rupee
debt soured after Prime Minister Narendra Modi’s administration unleashed a surprise tax break on Sept. 20 to shore up growth. Ten-year yields jumped the most since February 2017 amid fears the authorities would be forced to sell more bonds to make up for an estimated 1.45 trillion rupees of lost revenue.
Benchmark 10-year yields may rise to 7 per cent in the coming months from around 6.7 per cent due to worries about a wider budget deficit and increased bond supply, according to Mirae Asset and IndusInd Bank Ltd. Mirae warned yields could even vault past that level if the central bank doesn’t step in to conduct open-market bond purchases.
The concerns persist even after an assurance from a government official that the borrowing plan remains unchanged for the rest of the financial year. Finance Minister Nirmala Sitharaman has also said any review of the fiscal gap target will only take place nearer to the next budget in February. Traders remain skeptical, especially after Standard Chartered Plc estimated the government will need to borrow as much as 800 billion rupees more, and Fitch Ratings flagged the likelihood of a wider fiscal deficit.
“Sentiments have been impacted by the fear of additional supply,” said Shyamal Karmakar, head of rates and credit trading at IndusInd Bank in Mumbai.