(Bloomberg) -- Sovereign bonds fell and equities shed some gains in India as traders sold into this week's rally spurred by the record central bank payout to the government.
While the 1.76-trillion rupee ($24 billion) transfer lifted all assets in the first half, doubts about how the surplus would be used emerged as the day wore on.
“The bond market was sitting long and there seems to be profit-booking,” said Harish Agarwal, a trader at FirstRand Bank in Mumbai. GDP data due Friday will be the “next big trigger,” he said, adding that he still expects yields to ease toward 6%.
The windfall came as Finance Minister Nirmala Sitharaman late Friday took a slew of measures to revive growth, but resisted the pressure to deliver a big fiscal stimulus as she strives to meet a fiscal gap goal of 3.3% of GDP.
While the government might use the cash to meet its deficit aim, according to people with knowledge of the matter, Kotak Mahindra Bank said the risk of fiscal slippage remains because of weak tax collections and weak growth.
“While the initial reading could be positive for government bonds, fiscal slippage risks will continue to weigh on yields,” the bank said in a note.
The yield on the benchmark 10-year bonds rose three basis points to 6.51% after dropping as much as 13 basis points. It fell nine basis points Monday as fears the government may borrow more to fund stimulus eased.
The rupee rose 0.4% to 71.70 per dollar and key equity indexes were modestly higher after logging their best day in three months on Monday. The S&P Sensex rose 0.4% in choppy trade, off its 0.6% intraday gain.
The twin announcements are a “conducive combination” for equities and bonds, said Chakri Lokapriya, chief investment officer at TCG Asset Management, which oversees about $3 billion of assets.
“The RBI's cash transfer in essence infuses liquidity and lowers borrowing cost for companies as it allows transmission of rates by banks,” he said.
To contact the reporters on this story: Subhadip Sircar in Mumbai at ssircar3@bloomberg.net;Ameya Karve in Mumbai at akarve@bloomberg.net
To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Ravil Shirodkar, Shikhar Balwani
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