Additional Govt borrowing: Yields to be sticky; FIIs need not view it as negative

The government will borrow additional Rs 50,000 crore during January-March, raising the gross market borrowing target of the government to Rs 6.3 lakh crore for the financial year 2017-18.

The government, every year borrows from the market to reach its yearly expenditure and interest payment obligations. The gross borrowing for 2017-18 was pegged at Rs 5.8 lakh crore, with net borrowing aim at Rs 4.25 lakh crore, after taking into account the redemption figures.

This has raised questions if the government will be able to stick to their fiscal deficit target of 3.2 percent of the Gross Domestic Product (GDP) during 2017-18. It has also pushed the bond yields to 7.33 percent.

Discussing the above, Vivek Rajpal, Rates Strategist, Nomura India said since the additional borrowing turns out to be on the higher side of market expectation the bond yields are expected to remain sticky.

According to him, the market was expecting addition INR 300 billion but INR 500 billion is on the higher side on higher side of expectation. Moreover, in India it is difficult to differentiate between the fiscal and the monetary policy.

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Upasna Bhardwaj

Senior Economist|Kotak Mahindra Bank

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There has been an effective rise in yields, which means positioning is light in the market but there will be no relief in bond markets, said Rajpal in an interview to CNBC-Tv18.

Upasna Bhardwaj, Senior Economist, Kotak Mahindra Bank said if one looks at the revenue collections and the shortfall that is expected, especially the shortfall arising due to indirect tax collection, it will be difficult for the Center to meet their fiscal deficit.

When asked if the difficulty of the government to meet the fiscal deficit target would be taken as a negative on our macros, she said already the inflation dynamic is not favourable, current account deficit is under pressure because of crude – so all our fundamentals seem to be slightly deteriorating but that does not  mean the FIIs need to treat this as negative because there are structural reasons why the slippage is arising -- it is a revenue shortfall and not an expenditure cut. Moreover, it is a short-term issue.