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Government borrowing fears chill bond market

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Bond yields
Foreign banks are said to have sold their bond holdings with increasing yields, dealers said.
India’s benchmark bond yield surged 24 basis points, pulling prices down, after finance minister Nirmala Sitharaman announced cuts in corporate taxes, stoking concerns of additional sovereign borrowings.

This is the largest single-day yield jump in about 32 months. Bond yields and prices move in opposite directions.

“Corporate tax cuts are a concern for bond investors for now,” said Murthy Nagarajan, head - fixed income at Tata Mutual Fund. “We expect fiscal deficit to widen this financial year due to the ₹1.45 lakh crore of revenue sacrificed due to these measures.”

Bonds pared some of the losses to close at 6.79% Friday versus 6.64% a day earlier as some state-owned banks were seen buying at a higher level.

Foreign banks are said to have sold their bond holdings with increasing yields, dealers said.

The fiscal deficit, or excess of expenditure over revenues, was initially estimated at 3.3%. With the latest tax cuts, dealers expect fiscal deficit in the range of 3.70-4% this financial year.

“While the cuts cheered equity investors, bond buyers have turned bearish, anticipating a rise in market borrowings,” said Ajay Manglunia, managing director, institutional fixed income, JM Financial. “Investors believe the government is likely to miss the fiscal deficit target this financial year and may need to borrow more to bridge the shortfall. That means more supply of bonds.”

The Reserve Bank of India (RBI) will announce its bi-monthly policy in first week of October amid expectation of rate cuts.

“Bonds yields may remain elevated unless the RBI cuts rates in its next policy and the market gets comfortable about additional supply,” Manglunia said.

Efforts to drive growth and the government’s proposed plan to borrow overseas should keep domestic borrowings under check and prevent yields from rising.

“If the additional borrowing is done overseas, the bond markets will be well supported,” said Nagarajan.

Moreover, the government is also due to get ₹58,000 crore of additional dividend from the central bank.

The rupee gained more than half a percent on expectations of overseas fund inflows. The local unit closed at 70.95 a dollar Friday compared with 71.33 a day earlier.

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