Indian bond yields climbed to an 18-month high, aided by gains of about a percentage point in the cost of funds since the summer, as investors rushed to sell sovereign securities amid concerns that augmented federal borrowing would cause New Delhi to fall short of its published fiscal consolidation goals.
The Reserve Bank of India (RBI) is said to have spoken to select market participants about the direction of capital costs in Asia's third-largest economy after the government announced plans for additional borrowing, three people familiar with the matter told ET. An email sent to the banking regulator remained unanswered until the publication of this report.
The benchmark yield shot up 18 basis points – their second-highest daily climb this year – to close at 7.40%Thursday. Bond yields and prices move in opposite directions.
"Chances of fiscal slippage have caused panic in the market," said Naveen Singh, senior vice-president at ICICI Securities Primary Dealers. "Many institutional investors have incurred losses as they exited their holdings, bought at much lower yields. The trend of rising yield is here to stay for some time, and investors are now fearful about higher borrowings next year."
A rising yield curve means companies that sell corporate bonds to mop up capital will have to fork out more for debt funds. Corporate bonds are priced in kilter with the benchmark yield.
"There is no trend reversal in sight, although the current yield levels are attractive enough," said Jayesh Mehta, MD & country treasurer of Bank of America-Merrill Lynch India. "Unless there are new sets of buyers, the extra supply through additional borrowings will push yields up."
The government will borrow Rs 50,000 crore extra by selling sovereign bonds between January and March. This could mean that the estimated fiscal deficit target at 3.2% of Gross Domestic Product (GDP) in FY17 may widen by about 50-60 basis points, dealers said.
"It is still not certain whether the additional borrowing is a consequence of a shortfall in other avenues of deficit financing, or actually a fiscal slippage," said Ajay Manglunia, executive vice president at Edelweiss Financial Services. "But Gsecs supply is expected to balloon and rates are expected to stay higher."
A widening fiscal deficit, or excess of expenditures over revenues, means that the government will borrow more to plug the gap.
Rising global crude oil prices too raised India's inflationary expectations, which remain the key gauge for monetary policy decisions. India has also seen lower tax mop-up with cuts in the Goods and Services Tax (GST) rates. </span>
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