Indian bond yields, swaps mostly steady

MUMBAI: Indian federal bond yields and swaps were mostly steady on Friday, as traders awaited the government's market borrowing figure for the fiscal year starting April, to be announced in the annual budget due shortly.

At 9:52 a.m. (0422 GMT), the 10-year benchmark bond yield was at 8.35 percent, compared with 8.36 percent on Thursday.

The benchmark five-year swap rate was unchanged at 7.57 percent, while the one-year rate  was 1 basis point higher at 8.19 percent.

Finance Minister Pranab Mukherjee is slated to begin his budget speech at 11 a.m. (0530 GMT) in the lower house of Parliament.

The government is expected to go for a higher market borrowing of 5.3 trillion rupees ($105.37 billion) in 2012/13 from 5.1 trillion rupees this year, a Reuters poll this month showed.

If the borrowing is higher than expected, the 10-year yield may rise to around 8.40 percent, and by March end to around 8.47 percent, said Ashish Vaidya, executive director and head of interest rates at UBS.

For the ongoing financial year ending this month, the government had raised its borrowing target twice to 5.1 trillion rupees because of higher spending and slower revenues.

Since late November, the huge supply of bonds was balanced out with the Reserve Bank of India's open market bond purchases.

Some traders expect the RBI to hold off on the bond purchases from April, as the liquidity tightness in the banking system is likely to ease following a sharp 75 basis point surprise cut in the cash reserve ratio for banks, affected last week.

The move is estimated to have released about 480 billion rupees of primary liquidity into the banking system.

However, in the RBI's mid-quarter review of the monetary policy on Thursday, the central bank kept interest rates unchanged citing resurgent inflationary pressures, and focused on the yawning fiscal gap of the government that has threatened the inflation outlook.

India is on track to miss its target of cutting the fiscal deficit to 4.6 percent of gross domestic product (GDP) in the current fiscal year by more than a percentage point, thanks to a sluggish economy and a ballooning subsidy burden under a populist-leaning Congress party government.

Grappling with a yawning fiscal deficit will be crucial to restoring credibility for the government in this budget that was stretched in the last budget by unrealistic assumptions.

Until close of session, the 10-year yield is likely to move in 8.30-8.40 percent band.