India bonds rally to 30-month high after govt cancels debt sale

MUMBAI: India's benchmark bonds rose to their highest level in two-and-half years after the government cancelled the last scheduled debt sale for the current fiscal year, raising expectations the government is serious about managing its high fiscal deficit.

The finance minister has said he would contain the fiscal deficit for the current fiscal year ending March at 5.3 percent of the gross domestic product and cut it to 4.8 percent in the next fiscal year.

The cancellation of the 120-billion-rupee debt auction scheduled for this week comes after the government has already announced several spending cuts and accelerated its stake sales to meet the deficit target, building up its cash position.

India is putting welfare, defence and road projects on the chopping block in a last-ditch attempt to hit a tough fiscal deficit target by March, risking short-term economic growth and angering cabinet colleagues.

"The auction cancellation means no supply till March end, which is a huge positive. Market is now hopeful of better fiscal management by the government even next year," said Harish Agarwal, a fixed income dealer with First Rand Bank.

At 0420 GMT, the benchmark 10-year yield was down 4 basis points at 7.78 percent, a level last seen on Aug. 9, 2010.

The gains in bond prices come after the government announcement late on Monday. Bond markets were closed on Tuesday for a banking holiday.

Bond markets have rallied since late December on hopes the government would maintain fiscal discipline and on expectations of interest rate cuts from Reserve Bank of India.

India's finance minister plans to cut the public spending target for fiscal 2013/14 by up to 10 percent from this year's original target, in what would be the most austere budget in recent history as he tries to avert a sovereign credit downgrade.

Traders said the 10-year bond yield may move between 7.70 to 7.80 percent until the budget on Feb. 28.

The market is also hopeful the central bank will annouce another round of open market operations to buy bonds as the banking system liquidity deficit continues to remain much above its comfort zone.

Banks' borrowed 1.26 trillion rupees from the central bank on Monday, with borrowing remaining above 1 trillion rupees for eight consecutive sessions.

"The auction cancellation news is very positive and OMOs cannot be ruled out, so 10-year should touch 7.75 in the near-term," said Bekxy Kuriakose, head of fixed income at Principal PNB Asset Management.