MUMBAI: Indian bonds gained for a third session on Thursday after Reuters reported that the finance ministry was working on a proposal for the new government to rein-in the fiscal deficit in its first budget, citing two senior officials.
The sources said India could bring down the fiscal deficit to around 3.8-3.9 percent of GDP, from the current target of 4.1 percent, and that it could also reduce borrowing from markets by 250 billion rupees ($4.25 billion).
Traders said the focus will shift on Friday to the 160 billion rupee ($2.72 billion) debt sale, although they expect gains to resume once auction bidding is out of the way as the sale is expected to go through without hiccups.
"We could see the rally in markets continue tomorrow afternoon, once bidding for the auction is over," said Harish Agarwal, a fixed income trader at First Rand Bank who expects the auction to go through smoothly.
The benchmark 10-year bond yield closed down 6 basis points on the day at 8.71 percent. Yields have dropped a total of 15 bps over the last three trading sessions.
Bonds were relatively range-bound ahead of election results on Friday, which showed the Bharatiya Janata Party led by Narendra Modi sweeping to victory, given concerns the new government would announce a higher borrowing figure in its budget due by mid-July.
After the victory, expectations the government may not actually resort to higher borrowing as it would also push up interest rates, in turn hitting growth, has helped fuel a short-covering rally.
India's benchmark five-year overnight swaps and the one-year rate both closed down 4 basis point each at 8.19 percent and 8.40 percent respectively.
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