Bond Slide in India Reflects Fiscal Jitters About Farm Stimulus

(Bloomberg) -- Sovereign bond yields in India spiked Wednesday, a sign of just how skittish investors have become about the health of the nation's finances ahead of an awaited farm-relief package and a federal budget.

Government debt sold off across the curve after Reuters reported that Prime Minister Narendra Modi's Bharatiya Janata Party favors an expansionary fiscal policy and doesn't view the government's 3.3 percent deficit target for the year ending in March as “sacrosanct.”

“There's a demand, there's a debate -- all my colleagues are saying what's the need of keeping the fiscal deficit in check when there is distress in a particular sector,” Gopal Krishna Agarwal, a spokesman for BJP, was quoted as saying in the report.

While the government has yet to outline its farm-relief package, media reports have pegged the cost at as much as 3 trillion rupees ($42 billion). That has spurred concern about fiscal slippage as the BJP gears up for an election this year and prompted overseas investors to sell sovereign debt. Fiscal deficit for the April-November period is already at about 115 percent of the year's target.

“The market is already on tenterhooks on the fiscal front,” said Badrish Kulhalli, head of fixed income at HDFC Standard Life Insurance Co. “The comments on expansionary fiscal policy has played to those fears.”

Read: Global Funds Sour on India Sovereign Bonds, Buy Company Debt

The yield on the most-traded 7.17 percent 2028 government bond rose as much as 9 basis points after the report. It was last trading up 7 basis points, set for its highest close in over a month. The new 2029 bond maturing January was also up three basis points to 7.28 percent. The rupee weakened 0.2 percent to 71.20 per dollar.

To contact the reporter on this story: Subhadip Sircar in Mumbai at ssircar3@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Ravil Shirodkar, Anand Basu

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