The 10-year benchmark bond yield on Monday rose 20 basis points to close at 6.17 per cent from 5.971 per cent on Friday, amid worries over a worsening of India’s fiscal position.
The Centre last Friday said its total market borrowing requirements will rise by a whopping 53 per cent to Rs 12 lakh crore in the current fiscal, as falling revenues and rising expenses are expected to result in a sharp deterioration in the government’s finances. This indicates that fiscal deficit for the year could spurt to 5.5 per cent of GDP, a sharp jump of 2 percentage points from the target of 3.5 per cent, in view of the pandemic.
“At approximately 2 per cent of GDP, this is at the lower end of the expected requirements for additional financing by the government and by no means sufficient to bridge both the revenue gap as well as the discretionary stimulus ahead. This is true even after accounting for the substantial fuel excise tax hike announced recently. That said, nothing stops a further addition to the gross borrowing down the line,” said Suyash Choudhary, head—fixed income, IDFC AMC.
Alternatively, or additionally, other sources of financing — including a heavier dependence on short term borrowing via treasury bills — may be in play. Furthermore, the picture is yet to be clarified with respect to how states’ financial distress is to be addressed.
“The size of hike in borrowing notwithstanding, the template for the bond market is clear: this is the biggest growth shock to the global economy in multiple decades and the size of fiscal financing embedded in such a scenario can only be financed by the central bank,” Choudhary said.
Meanwhile, the rupee on Monday fell 19 paise to close at a one-week low of 75.73 against the US dollar due to fiscal deficit concerns over the government raising its borrowing for FY21. While domestic equities declined, market participants were concerned about the impact of increased borrowing on the fiscal deficit. The Sensex declined by 81.48 points, or 0.26 per cent, to 31,561.22, while the Nifty fell 12.30 points, or 0.13 per cent, to 9,239.20.
Traders said market participants are also awaiting the next round of stimulus from the government to cushion the economic damage inflicted by the COVID-19 crisis. Moreover, any cues on the removal or extension of lockdown will be keenly awaited, they said.
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