Budget 2020: Bonds Poised To Rally As Fiscal Deficit Targets Meet Expectations

Government bonds look set to rally when markets open on Monday after the new Budget projected fiscal deficits in line with expectations, without any further market borrowing during the current fiscal year.

Finance Minister Nirmala Sitharaman outlined a multi-billion dollar package for farm and infrastructure spending in the budget for 2020-21, but the stimulus fell short of market expectations and stocks slumped during a special trading session on Saturday.

Bond market players, however, said the revised fiscal deficit target of 3.8 per cent for the current fiscal year and 3.5 per cent for the next were largely in line with expectations.

"The market expected extra borrowing for this year, that hasn't come. Also foreign portfolio limits have been opened up in some bonds and that could lead to those bonds being included in international bond indexes," said A Prasanna, head of fixed income at ICICI Securities Primary Dealership.

With the government expected to miss its fiscal deficit target, investors had assumed it would borrow additional funds from the market over the next two months to fund the deficit, but the government has made adjustments to avoid this.

Traders predicted a 5-10 basis-point rally in bond yields on Monday, but said there would be strong resistance for the benchmark 10-year bond around 6.5 per cent levels. The benchmark 10-year bond yield closed at 6.6 per cent on Friday.

Traders said although yields will fall in the near-term, gross borrowing of Rs 7.8 lakh crore for the next fiscal year will be challenging for investors, as this could push yields higher over the medium term.

"There is huge surplus liquidity in the market, so RBI (Reserve Bank of India) is unlikely to announce any open market operations and in the absence of any RBI support, the pressure on the market will be huge," a senior debt trader at a private bank said.

The government has said it will borrow a net Rs 5.36 lakh crore from the market in 2020-21, buy back Rs 30,000 crore worth of bonds and switch Rs 2.7 lakh crore worth of debt.

India's nominal growth projection and fiscal deficit target for 2020-21 will be challenging to achieve, a Moody's analyst warned on Saturday.

Traders also said the government's divestment target was fairly high and they would monitor it closely to see if the government can raise that money. If the government falls short, there was a risk of market borrowing rising further.

The government aims to raise Rs 2.1 lakh crore by stake sales next year.

Government officials said they were taking steps to allow better access to Indian bonds, allowing unlimited investments in some bond categories.

One official said the government hopes to be included in two global bond indices in 2020-21.