How will debt market likely to react to Budget

MUMBAI: Inflation control, the global bond index and gross federal borrowing: This triad will weigh on the debt markets Monday when finance minister Nirmala Sitharaman announces the Budget, which could immediately lower yields 10-15 basis points through measures the Street considers positive.

A basis point is one hundredth of a percentage point.

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“The debt market was probably bracing up for a negative surprise,” said Jayesh Mehta, India country treasurer at Bank of America. “If the Budget addresses the concerns on government borrowing and lifts market sentiment with some concrete announcements, a relief rally in the sovereign bonds is likely, lowering funding costs.”

The benchmark yielded a tad higher at 5.95% Friday. The gauge traded in a narrow band of three basis points over the past one week.

“Speculation is rife that the budget may tweak inflation targeting, with the government willing to live with higher growth, but high inflation,” said Naveen Singh, head of trading at ICICI Securities PD. “In the short term, it is a positive for the bond market.”

The Reserve Bank of India (RBI) is supposed to maintain consumer inflation at 4%, with a 200 basis points tolerance either side. The mandate expires by March-end this year.

The one-month Overnight Indexed Swap (OIS), a derivative gauge for future rates, yielded 3.51%, five basis points lower than its near-term peak two weeks ago.

When bond yields rise, prices fall.

India’s proposed inclusion in the global bond index was earlier mentioned in the last Budget. It did not progress much amid hard negotiations.

“If the government lays down a definite timeline for India’s inclusion into the bond index, it would trigger a rally in the GSEC market,” said Vijay Sharma, senior executive vice president at PNB GILTS. “The mere statement of intent will not bring any cheer but what will is a concrete roadmap ensuring liquidity for those papers – a key factor for international investors.”

But, any relief could well be short-lived unless it is backed by follow-up actions.

Global investors keen to own Indian sovereign papers from a global index are demanding the deployment of Euro Clear, an international settlement platform for transacting securities. India is yet to approve the use of the platform that doesn’t reveal the names of investors.

Earlier, the authorities created a dedicated pool known as Fully Accessible Route (FAR), where non-resident and overseas investors could invest in select sovereign bonds, with no upper limit. There are a dozen sovereign bonds included in the category.

The market estimates the government’s gross borrowing plan in the range of Rs 10-10.5 lakh crore. Anything less is likely to trigger a short-term rally in bonds.

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