FM fails to bond with debt market

Bond prices fell on Friday as the money market saw its worst fears coming true in terms of an oversized government borrowing. Sentiment for the rupee, however, improved as the Budget had several measures to encourage dollar flows and control demand.
The yield on the 10-year government bond shot up almost 10 basis points to close at the day’s high of 8.42%.Bond dealers forecast that yields could rise to 8.5% by end-March. In terms of the Budget proposals unveiled by the finance minister on Friday, the net government borrowing in 2012-13 will be Rs 4.79 lakh crore as against Rs 4.36 lakh crore last year. The increase in bond yields would hit banks’ profits and keep pressures on interest rates.
“The high borrowing announced by the government is a negative for the bond market. The market had been hoping that there would be some political policy move towards fiscal consolidation. What has come out is a normal income and expenditure statement,” said Ashish Vaidya, head of fixed income currency and commodities trading at UBS India. He said that given the demand for funds from government, bond yields could go up to 8.5% by end-March.
In the forex market, the rupee firmed up to 50.19 against the dollar after the FM doubled import duty on gold to 4%. This is expected to stem the demand for dollar. “I think the volatility in the rupee has been contained and it should be range-bound at around 49.50 to 50 levels. Given that the rupee has been largely tracking the euro, I don’t expect the Budget to have any major impact on the exchange rate,” said Hariprasad M P, head of treasury at Centrum. Gold accounts for over 12% of India’s imports and continued demand for the yellow metal puts pressure on the current account.
Budget 2012
Budget News 2012