“Market participants were caught off-guard with the fiscal measures,” said Dhawal Dalal, chief investment officer for fixed income at Mumbai-based Edelweiss Asset Management Ltd. “Recent statements by the RBI and government officials had led to an impression that there was limited fiscal space available for large reforms.”
A gauge of volatility for India’s 10-year sovereign bonds
rose to an eight-month high.
Benchmark yields, which started Friday with a nine-basis points decline, ended the day 15 basis points higher.
They fell two basis points on Monday to 6.773%.
The unprecedented tax cut, estimated to cost 1.45 trillion rupees in lost revenue, may push up the fiscal deficit
to 3.9% of gross domestic product for the year to March, compared with a goal of 3.3%, according to a Bloomberg poll of economists.
The government will announce October-March borrowing plans by month end.
A combination of additional debt sale and likely monetary easing will steepen the yield curve, Standard Chartered analysts wrote in a note. While the short end should remain anchored due to surplus liquidity and rate-cut expectations, supply will likely weigh on the long end, they wrote.
IDFC Asset Management Co. is overweight on 5-7 years bonds while cutting duration in the 10-14 year segment in its active duration funds, it said in a note.