India bond yields edge lower

MUMBAI: Indian 10-year bond yields ended marginally lower o n Monday, but above the session low amid renewed concerns the government may have to borrow more to fund a fiscal deficit for the fiscal year that is expected to widen from its initial target.

The government is looking to contain the fiscal deficit at 5.3 percent of gross domestic product for the year ending in March 2013, wider than the 5.1 percent target announced in March, which may entail additional borrowing, Finance Minister P. Chidambaram told Reuters in an interview.

A senior finance ministry official said the government may borrow at least 200 billion rupees more this fiscal year. India had been scheduled to borrow a total of 5.69 trillion rupees for the year.

"It will not be too much of a concern if the extra borrowing is limited to 200-250 billion rupees," said Mahendra Jajoo, head of fixed income at Pramerica Mutual Fund.

"However, there are many other variables such as divestment and 2G auction proceeds which will determine whether the government can stick to its fiscal deficit target."

The benchmark 10-year bond yield ended 1 basis point lower at 8.19 percent, after trading in a 8.18 to 8.21 percent range during the day.

The government is already on a belt tightening mode with spending rising 1.4 percent in September compared to the same month in the previous year, well below the spending increase seen in the first five months of the fiscal year.

Chidambaram has vowed to keep spending on a tight leash to avoid an excessive widening in the fiscal deficit that would threaten the country's sovereign ratings.

However, analysts still remained sceptical. "If this crash diet continues, the fiscal deficit could be marginally lower than our estimates, but we still do not see it falling below 5.5 percent of GDP," Nomura said in a note.

Dealers added liquidity conditions would be closely watched p articularly if signs point to restrained government spending.

For now, markets will measure the impact from the Reserve Bank of India's 25 basis points cut in the cash reserve ratio, which became effective on Saturday and will add 175 billion rupees to the system.

India's benchmark 5-year OIS rate and the 1-year OIS rate were steady at 7.09 percent and 7.75 percent respectively.