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Bond market falls on inflationary budget

Mahesh Nayak     February 28, 2013
Concerns over inflation and the higher borrowing programme of the government pulled down the bond market on Budget day with the 10-year government securities (G-Sec) yield heading north. The 10-year G-Sec yields inched eight basis points (bps) higher to close at 7.88 per cent compared to its previous close of 7.80 per cent on Wednesday.

"We have seen the bottom in the yield curve," says Ritesh Jain, Head Investments at Canara Robeco Mutual Fund. "Going ahead, yields are all set to rise. I see the Budget being too optimistic and due to supply constraints it will lead to pressure on the bond yields." Jain sees the short-term yields rising by another 25 to 30 bps by April 2013. He feels the Reserve Bank of India will interfere and conduct open market operations to curb the fall in bond prices.

The reason for such pessimism in the bond market is because of high government borrowings, crowding out the private sector. The finance minister expects the fiscal deficit to be 4.8 per cent of the gross domestic product in FY2013/14, compared to 5.2 per cent in the current fiscal year, but the gross borrowing programme for 2013/14 is estimated to be around Rs 6.29 lakh crore, 12 per cent higher than Rs 5.6 lakh crore estimated for 2012/13. With 89 per cent of the fiscal deficit budgeted to be funded by market borrowings, bond yields are all set to scale higher.
Though it is not going to be a steep rise, the yields are expected to slowly inch higher. "The focus will remain on commercial paper, certificate of deposits and short-term corporate bonds whose maturity do not exceed two years," says Jain. With liquidity expected to be remain tight ahead of election year, it is anyone's guess how high the yields are heading. It may even be 8.30 to 8.50 per cent. But one thing is certain - yields have touched their bottom.

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