Why Budget dented debt market with surging yields

MUMBAI: Union Budget dented the debt market sentiment after the Finance Minister Nirmala Sitharaman announced larger borrowing plans to fund widening fiscal deficit belying average market expectation.

The benchmark bond yield surged as much as 17 basis points pulling prices down with investors seeking central bank intervention to arrest the market crash.

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The gauge touched about 6.10 percent from intra-day low at 5.93 percent in the morning trade, show data from the Reserve Bank of India. It is now trading at 6.05 percent recouping losses marginally.

“Market did not expect such high additional supply of papers in coming days,” said Naveen Singh, head of trading at ICICI Securities PD. “An element of negative sentiment will continue to prevail in the market unless the central bank intervenes to check rising yields.”

Mint Road, New Delhi’s investment banker, can primarily intervene through two ways. The RBI can purchase bonds the market, known as Open Market Operation (OMO), raising demand for papers. Also, it can buy sovereign papers on screen in the secondary market.

“Even an additional borrowing in this financial year has too surprised investors, who were expecting lower borrowing instead,” Singh said.

Finance Minister said, the government will borrow Rs 80,000 crore in the remaining next months this fiscal year.

She estimated gross borrowing at Rs 12.06 lakh crore for the next financial year. Bond dealers on an average expected the gross borrowing anything between Rs 10 – 10.5 lakh crore as they cited New Delhi’s higher cash balance with scheduled expenditures being stalled due to a virus outbreak.

Moreover, the projected fiscal deficit or an excess of expenditures over revenues too came higher for the year 2021-22. It is pegged at 6.8 percent versus over 5 percent as anticipated by an average market consensus. The virus induced crisis was seen a key reason behind the elevated number.

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