In the Union Budget 2009-10, the fiscal deficit in 2009-10 was proposed at 6.8% of gross domestic products (GDP).
Commenting on the same, Nilesh Shah, Deputy MD, ICICI Prudential said the potential of actual budget deficit being near to the projected budget deficit was pretty high. “Looking at the deficit, it doesn't look like the interest rates can soften further. Interest rates may not fall significantly in the near-term,” he said.

He further said the bond markets reacted negatively to excessive borrowing programme. “Net government borrowing programme is at Rs 34,000 crore,” he added. The reserve bank of India (RBI) had various tools to tackle borrowing and could manage government borrowing without impacting rates, he said. 
Also read: FY10 fiscal deficit can even cross 6.8%: DBS Chola
Here is a verbatim transcript of the exclusive interview with Nilesh Shah on CNBC-TV18. Also watch the accompanying video.

Q: You straddle both equities and fixed income so well tell us what you made of the way the bond market reacted to the budget and whether you fear that yields will remain this high?

A: The bond market has obviously reacted negatively to the excessive borrowing programme. The markets were expecting deficit somewhere to the south of 6.5% fiscal deficit, it came at 6.8% and that’s why there is a reaction. However the other market participants have not been able to view that – one, as of today yields which are prevailing are lower than what was prevailing last Friday and they have hammered banking stock much more than what was the level on last Friday. Second, the excess borrowing programme is not 90,000 crore as proposed in the budget; the government has already borrowed 18,000 crore from year to date and there is about 38,000 crore of desequestering of Market Stabilisation Scheme (MSS) bonds, so the net borrowing programme is 34,000 crore which needs to be absorbed within the system.

A lot will depend upon how Reserve Bank of India (RBI) conducts its open market operations, how RBI kind of comforts the market which is trading substantially higher than what is their corridor of repo rate and reverse repo rate and eventually the markets probably will also take into account that this is one of the few budgets where the revenue projections is not excessive, not optimistic; its realistic and hence the potential of actual budget deficit being near to the projected budget deficit is pretty high.

So we are in a scenario where interest rates will gradually inch up because of the inflation concern because of the supply side from the government’s borrowing programme because of the corporate demand which may happen on recovery but it does not necessarily mean that spike will come on a single day basis like it happened yesterday and within this overall gradually inching up interest rate scenario there will be enough rallies where yields will also come down.
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