MUMBAI: Indian government bonds fell to their lowest in more than two weeks on Thursday after the finance ministry announced a gross market borrowing target that was well above expectations, dashing hopes of reduced debt supply.
The government is planning to borrow 6.29 trillion rupees in the fiscal year starting April, higher than the 5.58 trillion rupees for the current fiscal year, according to the budget unveiled by Finance Minister P. Chidambaram.
That was higher than market expectations of 5.6-5.7 trillion rupees, disappointing investors who were also sceptical about a budget that proposes higher spending as well as increased taxes.
The budget also raised doubts about whether it would be enough to spur Reserve Bank of India to cut interest rates, given fiscal consolidation was seen as a key criteria to spur more monetary easing by the central bank.
"The market borrowing numbers are higher than our estimates, and it is negative for the market. There will be upward pressure on yields," said Nagaraj Kulkarni, South Asia senior rates strategist at Standard Chartered Bank in Singapore.
"However, interest rate cuts by the Reserve Bank of India need not be related to market borrowing. They will focus on the quality of the fiscal consolidation."
The benchmark 10-year bond yield rose 7 bps to 7.87 percent from Wednesday's close, after earlier rising to as high as 7.88 percent, the highest yield since Feb. 12.
Yields had fallen over 35 basis points since Dec. 21 on hopes of the government's fiscal discipline and rate cuts from the central bank.
Net borrowing was also slightly higher than expected, with the government targeting 4.84 trillion rupees in 2013/14, above expectations for the government to keep it inline with this year's 4.67 trillion rupees.
Interest rate swaps also rose with the 5-year OIS up 5 bps at 7.23 percent. The near-end 1-year OIS rose 2 bps at 7.62 pct.
Dealers said the government announced a higher-than-expected gross borrowing target to accommodate a 500 billion rupee buyback programme.
Bonds dealers are now awaiting the December quarter GDP numbers due at 1130 GMT for further cues. Any number cementing the evidence of slowing economic growth may help arrest the rise in yields, they said.
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