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Responding positively to the Union government's decision to stick to fiscal deficit targets, the yields on government securities eased substantially on the last trading day of February.
The yield on the Government of India's benchmark paper (7.59 per cent 2016) fell by 15 basis points (a basis point is a hundredth of a percentage point) to 7.62 per cent, according to Bloomberg data. The rupee strengthened at 68.41 against the dollar. The rupee had closed at 68.41 on Friday last.
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Hariharan Krishnamoorthy, treasurer at First Rand Bank, said the resolve to stick to fiscal deficit targets for 2015-16 and 2016-17 and the manageable market borrowing programme for the next financial year had a positive impact on bond trading.
Keeping in view the negative fallout of higher borrowings on private investment and growth, the government in the budget for 2016-17 decided to follow the fiscal consolidation roadmap. It will contain the fiscal deficit of the Centre at 3.9 per cent in 2015-16 and 3.5 per cent in 2016-17.
In 2015-16, net market borrowings through dated securities at Rs 4, 56,405 crore were budgeted to finance 82.1 per cent of the gross fiscal deficit. The total borrowing requirement for 2016-17 has been budgeted at Rs 6,00,000 crore. Net market borrowings of Rs 4,26,670 crore through dated securities have been budgeted to finance nearly 80 per cent of the gross fiscal deficit.
Dealers said yields had stopped hardening for now but easing from current levels would be shaped by rupee movements and liquidity.
Analysts said though the government had stayed on the fiscal consolidation path, the Reserve Bank of India (RBI) was unlikely to cut the repo rate soon when liquidity was exerting pressure on bond yields. The repo rate is at which banks borrow short-term money from the RBI.
Any repo rate cut will have a negligible impact on yields. The market was short of Rs 1,80,000 crore in resources as the government had kept a tight leash on expenditure and more money was expected to move out of the system as the last tranche of income tax, said a bond dealer with a public sector bank.
Dwelling on steps to deepen the corporate bond market, Jaitley said Life Insurance Corporation of India would set up a dedicated fund to provide credit enhancement to infrastructure projects. The fund will help in raising the credit rating of bonds floated by infrastructure companies and facilitate investments by long-term investors.
The RBI will issue guidelines to encourage large borrowers to access a certain portion of their financing needs through the market mechanism instead of banks. The investment basket of foreign portfolio investors will be expanded to include unlisted debt securities and pass-through securities issued by special purpose securitisation vehicles.
For developing an enabling ecosystem for the private placement market in corporate bonds, an electronic auction platform will be introduced by the Securities and Exchange Board of India (Sebi) for primary debt offers. A framework for an electronic platform for the repo market in corporate bonds will be developed by the RBI.
A complete information repository for corporate bonds covering both primary and secondary market segments will be developed jointly by the RBI and Sebi.