Bond yields to soften as borrowings tamed

Rupee seen appreciating with CAD at $45 bn for FY14

Government bond yields could fall further as its market borrowing announced in the vote-on-account was in line with market expectations. The rupee, on the other hand, is seen range-bound, as the current account deficit (CAD) is seen narrowing. The yield on the 10-year benchmark bond could even fall to 8.70 per cent before the financial year ends while the rupee can appreciate to 61.50 to a dollar.

In the interim Budget announced on Monday, Finance Minister P Chidambaram said the fiscal deficit would be contained at 4.6 per cent of the gross domestic product (GDP). Chidambaram also announced that gross market borrowing would be Rs 5.97 lakh crore, while the net figure will be Rs 4.57 lakh crore for FY15. Besides, Chidambaram said CAD was seen at $45 billion for FY14. The projection is well below the record high level of 2012-13. In the first half (April-September) of 2013-14, CAD narrowed to $26.9 billion (3.1 per cent of the GDP) from $37.9 billion (4.5 per cent of the GDP) in the first half of 2012-13.

Earlier, the fiscal deficit was pegged at 4.8 per cent of the GDP for the current financial year. For the current one, the gross and net market borrowing was revised to Rs 5.63 lakh crore and Rs 4.68 lakh crore, respectively. Moses Harding, group chief executive officer (liability and treasury management) and chief economist at Srei Infrastructure Finance, said: “The rupee value of around 62 takes into account the switch of dynamics in twin deficits in favour of the rupee. The concerns from adequate flow of quality capital flows, conflicts in growth-inflation dynamics and political risk factors continue to retain the structural imbalance in demand-supply in the system. Taking all cues together, the risk of emergence of bunched up dollar demand is the worry point to put the rupee under pressure, while bunched dollar supplies will be absorbed by the Reserve Bank of India and importers.” According to Harding, the trading range will be 61.50-63.50 to a dollar till the Parliamentary election results are out.

The yield on the 10-year benchmark bond 8.83 per cent 2023 ended at 8.81 per cent, unchanged from the previous close. Said Brijen Puri, executive director and head of markets at JP Morgan: “The interim Budget was pretty much at expectations. The only thing is that the assumptions on the subsidies and tax collections are a bit aggressive. We had a similar situation in the last Budget as well. The yields are expected to be range-bound for the remaining part of this fiscal (FY14). The yield on the 10-year benchmark bond 8.83 per cent 2023 is seen trading between 8.70 per cent and 8.90 per cent.”

According to Puri, the central bank has been looking at reducing the volatility in the rupee. “The rupee may trade in the range of 61.50-63.50 till elections, barring a very large move in the global emerging market universe.”