The government bond yields were largely unchanged with the 10-year benchmark bonds settling at 8.80% despite a smaller-than-expected size of the government’s market borrowing for 2014-15 in the interim budget. Bond traders said the risk of a revision in the borrowing number is high as it was just an interim budget.
The benchmark 8.83%, 2023 bond yields fell to 8.77% intraday before ending at 8.80% on Monday. The yields had closed at 8.81% on Friday.
The finance minister pegged the fiscal deficit for 2014-15 at a seven-year low of 4.1% and revised the current year’s deficit to 4.6% from the earlier estimated 4.8%.
Chidambaram pegged the gross borrowing for 2014-15 at Rs 5.97 lakh crore, lower-than-market-expectations of R6-6.4 lakh crore. For the current financial year, the gross borrowing was R5.63 lakh crore. On a net basis, the borrowing for 2014-15 would be R4.57 lakh crore, marginally lower than the current year’s R4.68 lakh crore.
?Market has taken these numbers at face value. But these numbers lose relevance when the new government takes over,? said Manish Wadhawan, head of rates at HSBC. Wadhawan expects the 10-year bond yields to remain in a narrow range of 8.65-8.85% until March.
Some market participants believe the tightening liquidity conditions anticipated in March may put upward pressure on bond yields.
?Yields are likely to trade with a hardening bias on account of tight liquidity, especially towards March-end and a large borrowings programme indicated for the next financial year in the interim budget,? said Brijesh Mehra, MD and head of international banking, India, at RBS. Typically, liquidity tightens in the banking system in March due to advance tax payments and financial year-end push for credit from banks. The liquidity deficit has already increased and is reflected in the rise of banks’ borrowings from the daily repo tender to an average of Rs 38,000 crore last week from Rs 24,000 crore a week ago.