10-year bond yields are up eight basis points to reach a one-year high of 6.78%. Rupee strengthens 19 paise at open on Monday, and reports suggest that RBI is selling the dollar offshore to support the rupee. This is after the Centre unveiled a higher-than-expected borrowing programme in the Union Budget, raising concerns over debt supply and liquidity conditions.
Finance Minister Nirmala Sitharaman announced that the government will borrow a record Rs 17.2 lakh crore in the financial year beginning April 1, an 18% increase from the current year and well above market expectations of around Rs 16.3-16.5 lakh crore. The sharp rise in gross borrowing has revived fears of a demand-supply imbalance in the bond market.
Bond yields were already hovering near their highest levels in almost a year ahead of the budget, weighed down by heavy issuance from both the Centre and states, as well as muted demand from long-term investors such as pension and insurance funds.
While the government reiterated its commitment to fiscal consolidation, pegging the fiscal deficit at 4.3% of GDP for FY27 versus 4.4% in the current year, higher redemptions have pushed borrowing needs higher. Net borrowing is estimated at rs 11.7 trillion, compared with rs 11.3 trillion this year, while redemptions are projected to surge nearly 70% to about Rs 5.5 trillion. In addition, the government plans to raise Rs 1.3 trillion via treasury bills, compared with none in the current year.
The rupee, meanwhile, remains vulnerable amid weak capital flows and tight domestic liquidity. The currency had slid to a record low of 91.9875 per dollar on Friday and has fallen more than 2% in January.
According to Suyash Choudhary, Chief Investment Officer – Fixed Income at Bandhan AMC, the bond market is caught between an adverse global backdrop pushing yields higher and aggressive RBI open market operations limiting the upside, suggesting near-term volatility is likely to persist.
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