Budget 2022 | 10 year bond yield surges 20 basis points as Centre misses fiscal deficit target

The 10-year government bond yield surged nearly 20 basis points after the Centre said it had missed the fiscal deficit target for the financial year 2022.

The government also increased the fiscal deficit and borrowing target for the next year. Analysts say that no mention of tax changes required for foreign investors to invest in bonds also dampened sentiment.

The 10-year bond yield rose to 6.85% from its previous close of 6.67%. Bond yield and prices move in opposite directions.

Meanwhile, rupee erased all its morning gains and weakened. The home currency was trading at 74.76 a dollar, down 0.2% from its previous close.

"Post-budget market reaction was divided between upbeat equities which reflects optimism over a strong capex and growth push, whilst bond markets fretted over an increase in borrowings and absence of tax measures to pave the way for bonds to be Euroclear-eligible and in turn ease inclusion into global indices," DBS Bank economist Radhika Rao said in an email from Singapore.

The government said it has revised the fiscal deficit target for FY22 to 6.9% from 6.8%. For the next year it set the target at 6.4%, much higher than expected.

Analysts expected fiscal deficit for FY23 at 5.8% and estimated strong tax revenue growth to offset the divestment slippage, ensuring the fiscal deficit target of 6.8% was met in FY22.

Gross borrowing target for the next fiscal has increased to Rs 14.95 trillion against estimated Rs 12- 12.5 trillion.

"The higher than anticipated fiscal deficit and gross borrowing at nearly Rs 15 trillion, along with no update on measures to facilitate the awaited bond index inclusion, pushed up the 10-year G-sec yield past 6.88% intraday, wiping out the benign impact of the switch/conversion announced yesterday. The large dated borrowing coupled with the impending repo rate hikes can push the 10-year yield to 7.0% within the next quarter, which will set the stage for an upward shift in the entire yield curve," Aditi Nayar, chief economist at ICRA, said.