INDIA FX/BOND BUDGET WRAP: Bonds Steady as Borrowings in Check
(Bloomberg) -- Benchmark 10-year sovereign bonds trade little changed after Prime Minister Narendra Modi’s government stays on fiscal consolidation path and keeps market borrowing in check.
KEY HIGHLIGHTS
- FY18 fiscal deficit pegged at 3.2% of GDP versus 3% initial plan, but narrower than 3.3% estimate in Bloomberg survey; govt aims to achieve 3% shortfall in FY19
- Govt to shrink FY17 budget gap to 3.2% of GDP vs 3.5% goal
- Gross borrowing for FY18 via bonds seen at 5.8t rupees ($85.8b) vs 5.82t rupees actually borrowed in current fiscal; 250b rupees budgeted for bond switch and 750b rupees for buybacks
- Gross borrowing estimate in Bloomberg survey was 6.25t rupees
- Govt pegged FY18 net borrowing at 4.23t rupees, in line with survey estimate
MARKET REACTION:
- Yield on benchmark 6.97% 2026 bonds up 1bp at 6.42% after swinging between low of 6.37% and high of 6.46% as Finance Minister Arun Jaitley presented budget in parliament
- Rupee keeps early gains; up 0.4% to 67.5975/dollar in sixth day of advance
- One-year interest-rate swaps steady at 6.20%
KEY VOICES
- National Australia Bank (Julian Wee, senior market strategist)
- Bond markets should remain relatively attractive, especially since modest fiscal expansion allows room for RBI to ease further
- Budget was overall fiscally conservative; increase in FY18 deficit was modest and will probably please bond market and fiscal hawks
- Moody’s Investor Service (William Foster, vice president)
- Budget marks continuation of fiscal objectives; expect India’s deficit targets to be achieved, although there will be limited room for slippage
- Measures that effectively foster higher FDI would be credit positive by bolstering stable and balanced growth and providing stable financing
- Higher revenue seems likely to largely stem from higher incomes and profits, as well as improved collection
- Standard Chartered (Anubhuti Sahay, chief economist)
- Marginally disappointed by fiscal deviation; nonetheless, thrust on rural and infrastructure sectors is positive
- Still sees 25bps rate cut at next week’s RBI policy meeting as expects Jan. inflation to come in at 3-3.25%, much lower than RBI’s March target of 5%
- Trust Capital (Sandeep Bagla, associate director)
- Net borrowing is “non-disruptive” for bond market
- Bond yields can settle at lower levels now that supply- side concerns are over
- DBS Bank (Radhika Rao, economist)
- Govt has outlined “workable and realistic budget,” sticking to fiscal consolidation path
- Bond borrowings have been kept in control, limiting any negative spillover on debt markets
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People Narendra Modi (Republic of India)
Radhika Rao P (DBS Bank Ltd)
Anubhuti Sahay (Standard Chartered PLC)
Arun Jaitley (Republic of India)
Julian Wee (National Australia Bank Ltd)
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