Bonds may edge down as government eases up on fiscal targets

By Swati Bhat and Neha Dasgupta

MUMBAI (Reuters) - Indian bonds are vulnerable to mild falls on Monday after the government unveiled a budget that seeks an additional year to meet its medium-term fiscal deficit target to give it time to focus on economic growth by ramping up investments.

The federal budget also left major welfare schemes untouched, while only cutting fuel subsidies thanks to a collapse in international oil prices.

Still, the government also pledged to keep its market borrowing for the year to 6 trillion Indian rupees ($97 billion), slightly lower than market expectations, while reaffirming its commitment to its fiscal responsibilities.

That could help stave off any negative action from credit agencies or the Reserve Bank of India, which has tied future rate cuts to government moves to shore up its finances.

Moody's Investors Service on Saturday called the budget "credit neutral." [ID:nI8N0NO015]

"We had flagged risks of a higher deficit target to accommodate realistic economic assumptions, higher public expenditure and increased devolution to states," said Radhika Rao, an economist for DBS in Singapore.

"The higher target is unlikely to attract the immediate ire of rating agencies and the markets, but will need the ... fiscal performance to back that faith."

Traders said benchmark 10-year bonds may open slightly higher but then fall to profit-taking later in the session. The yield closed at 7.72 percent on Friday.

The government on Saturday set its fiscal deficit target for the fiscal year ending in March 2016 at 3.9 percent of gross domestic product, higher than expectations for around 3.6 percent.

Although the government said the eased fiscal deficit targets would allow it to focus on growth-related measures, traders added the lack of specifics in the budget in terms of revenue or expenditure numbers could weigh on sentiment.

($1 = 61.6489 rupees)

(Editing by Rafael Nam/Hugh Lawson)