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2/28/2016

Modi budget seen slipping with India bonds turning Asia's worst | Emerging Markets, Fixed Income | Bloomberg Professional

From the Blog Emerging Markets, Fixed Income

Modi budget seen


slipping with India bonds
turning Asias worst

BLOOMBERG NEWS FEBRUARY 25, 2016

This article was written byKartik GoyalandNupur Acharya.It appeared first


on the Bloomberg Terminal.
Indian sovereign bonds have turned into Asias worst performers in 2016,
from the best in the previous two years, amid concern Prime Minister
Narendra Modis budget will show fiscal discipline is slipping away.

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Modi budget seen slipping with India bonds turning Asia's worst | Emerging Markets, Fixed Income | Bloomberg Professional

Photographer: Udit
Kulshrestha/Bloomberg
The government may seek to borrow an unprecedented
6.8 trillion rupees
($99 billion) in the financial year starting April 1, according to the median
estimate in a Bloomberg survey of 10 fixed-income strategists and

economists before the fiscal plan is announced Monday. Thats 13 percent


higher than this years 6 trillion rupees estimate. The deficit target may be
raised to 3.7 percent from 3.5 percent.
HSBC Holdings Plc and Barclays Plc last week reduced their outlook on
Indian sovereign bonds saying more supply will put upward pressure on
yields. Modi looks set to loosen budget goals for a second consecutive
year amid a higher civil-servant wage bill and increased spending to
support growth in Asias third-largest economy during global market
turmoil.
A larger deficit will definitely increase the governments reliance on
borrowings from the market, said Himanshu Malik, a strategist at HSBC in
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Modi budget seen slipping with India bonds turning Asia's worst | Emerging Markets, Fixed Income | Bloomberg Professional

Hong Kong. If that happens, the government will definitely lose credibility,
foreign investors will be disappointed and the central bank wont have
much scope to cut rates further. That will be quite negative for bonds.

Rupee-denominated sovereign debt returned 8.1 percent last year and 16.5
percent in 2014, Bloomberg indexestracking major Asian markets show.
Investors have lost 0.03 percent on the bonds so far this year, compared
with returns of 4.6 percent from Indonesian notes, 3.7 percent from
securities in Thailand and 1 percent on Chinese debt.
Foreign holdings of Indian corporate and government bonds dropped 27.5
billion rupees in the last three days, the most since Dec. 29, data from
National Securities and Depository Ltd. show.
While the budget always garners market attention, this year it is also key to
the path of monetary policy. Sovereign debt could lose favor among
investors if the fiscal-deficit targets are missed, Reserve Bank of India
Governor Raghuram Rajan warned last month. He kept interest rates
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Modi budget seen slipping with India bonds turning Asia's worst | Emerging Markets, Fixed Income | Bloomberg Professional

unchanged on Feb. 2, signaling hed watch the budget before adding to


the biggest interest-rate cuts in six years in 2015.
Even though steps to boost revenue through taxes may help the
government meet its deficit target of 3.9 percent of gross domestic
product in the 12 months ending this March, the goal for the period
through March 2017 is seen pressured by a proposed increase in salaries for
millions of civil servants and higher pensions for military personnel.
Some fiscal progress was madethis year. The governments gross
borrowing is seen at 5.85 trillion rupees, less than the 6 trillion rupee
projection, while net borrowing is at 4.4 trillion rupees, compared with 4.56
trillion rupees, according to central bank data.
Yield jump
The yield on sovereign notes maturing in January 2026 has jumped 25
basis points since the new 10-year benchmark was issued early last month
to7.83 percent in Mumbai on Wednesday. One-year interest-rate swaps
have climbed to an almost seven-week high of 7.03 percent, suggesting
traders are paring bets for more rate cuts.
The rupee has weakened 3.5 percent in 2016 in Asias worst performance
after the South Korean won. Barclays last week said it prefers shortermaturity Indian bonds as it trimmed duration on rupee debt to neutral from
overweight. HSBCreduced the allocation of 10-year notes in its model
portfolio to mildly bullish from bullish.
Be credible
In the past two months, uncertainty around fiscal consolidation and
concerns about slippage have risen, with the government looking at
proposals to raise its budget deficit targets in order to steer more
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Modi budget seen slipping with India bonds turning Asia's worst | Emerging Markets, Fixed Income | Bloomberg Professional

spending into infrastructure, Rohit Arora,an interest-rate strategist at


Barclays in Singapore, wrote in a Feb. 18 report. The long end of the
bond-yield curve will be rangebound to weaker amid sustained higher
supply.
While gross market borrowing is estimated at 6.8 trillion rupees, the net
issuance, excluding redemption payments for existing securities, is seen
rising 5.3 percent from this years target to 4.8 trillion rupees, the median
estimate in the Bloomberg survey showed. Besides debt sales, the
government is expected to raise 500 billion rupees selling treasury bills
and state governments are seen raising another 2.2 trillion rupees,
according to forecasts by Australia & New Zealand Banking Group Ltd.
The budget needs to be credible, or else its a risk that may put further
pressure on the bond market, said Vivek Rajpal, an interest-rate strategist
at Nomura Holdings Inc. in Singapore. If the deficit target turns out to be
higher, say at 3.7 percent, markets will not take it kindly.

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