Cut in borrowings target by govt may boost India’s attractiveness

North Block has sought to re-establish India’s credentials as the world’s most attractive emerging-market economy by reducing its annual borrowing target, signaling the federal government’s intent to stick to fiscal austerity despite rising oil prices in an election year.“The government is serious about meeting the fiscal deficit target… This should prompt global investors to reconsider India investments, when they are shying away from emerging markets,” said Joydeep Sen, consultant with PhillipCapital India at the fixed income desk. “It has fully passed on the higher crude oil prices without relenting on the central duties.”On Friday, New Delhi reduced its annual gross borrowing target by Rs 70,000 crore between October and March. Of this, Rs 50,000 crore was announced in the FY19 budget proposals eight months ago. The government, however, did not want to raise borrowings even though oil prices have climbed steeply since the budget, and the local currency has declined sharply against the dollar, in lockstep with other emerging-market monetary units.The government would be borrowing Rs 2.47 lakh crore until March, 2019, compared with Rs 2.68 lakh crore borrowed between April and September this financial year.Aan immediate rally in bonds is unlikely as the bond market needs greater clarity, with a domestic cash crunch pushing yields higher and causing equities to lose the most since February 2016. Experts believe the benchmark yield may dip up to five basis points Monday, but a sustained fall in yields could take time.“The move to reduce gross borrowings is positive for the markets despite an increase in nonplanned expenditures,” said Naveen Singh, head of government securities trading at ICICI Securities PD. “But it needs to be seen how much of the reduction affects bond yields. The borrowing reduction should be supported by at least two open market purchase operations a month for it to make a meaningful impact.”The reduction in federal borrowing could be pursued either through higher collections from small savings or bond buybacks. A bigger share of collections via small savings should cheer the debt market.Alternatively, the reduction can be achieved through bond buybacks from the market, effectively amounting to deferred borrowing. If the government buys back, say, Rs 40,000 crore worth of bonds, redemption pressure equivalent to that amount will not be felt now but will resurface next year, perhaps requiring the government to borrow again.Dealers, however, attribute the government’s confidence to higher collections in small savings.“The reduction in the borrowing plan should help lift bond market sentiment, otherwise marred by fears of a liquidity freeze in the corporate bond market and a weaker rupee,” said Vijay Sharma, PNB GILT. “If this move is supported by a favourable RBI policy next Thursday, it should help sustain a rally in the bond market.”The debt market has faced a confidence crisis after a series of defaults by infrastructure conglomerate IL&FS: NBFC shares have slumped on concerns that they would fail to draw funds.

from Economic Times https://ift.tt/2Re9rfa