“The reduction in excise duties has allayed apprehensions of steeper rate hikes,” said Parul Mittal Sinha, head of financial markets, India, Standard Chartered Bank. “This has lowered the short-term yield curve in the bond market. At the same time, concerns about a higher budget deficit are keeping long-term yields high.”
This trend could continue unless the bond market is convinced of North Block’s ability to generate higher revenues despite lower fuel taxes.
Certainly, New Delhi’s borrowing is set to increase by more than ₹1 crore lakh due to likely higher fertilizer subsidies.
Government bonds maturing in the next two to five years fell 4 to 7 basis points, according to Bloomberg data. In contrast, the benchmark 10-year yield rose six basis points during the day, but closed at 7.39% on Monday, down from 7.36% on Friday. One basis point equals 0.01%. Yields and bond prices have an inverse relationship.
“It is likely that the borrowing target for the second half will be revised amid the reduction in excise duties and the increase in subsidy bills,” said Rajeev Radhakrishnan, chief investment officer, fixed income. ,
“Shorter duration yields are, for now, in check as the government’s decision would contribute to future staggering rate hikes,” Radhakrishnan said.
The relatively less liquid 14-year and 30-year sovereign gauges rose by 1 to 3 basis points.
Over the weekend, the Center decided to reduce the central excise duty on petrol and diesel. It also provided a subsidy window for cooking gas cylinders, amid soaring consumer prices. Inflation as measured by the consumer price index hit an eight-year high of 7.79% in April, with the wholesale inflation indicator hitting a record high of 15.08%.
On May 4, the Reserve Bank of India (RBI) raised the repo rate by 40 basis points in an unannounced monetary policy announcement, citing risks of soaring consumer prices. The burden of subsidies and foregone revenue from auto fuel could prompt the government to borrow more, which had previously planned to borrow Rs 14.21 lakh crore. Dealers expect this gross borrowing target to be exceeded.
“With the fuel price action, it’s now a two-pronged attack on inflation,” said Vijay Sharma, executive vice president,
GOLDEN. “The first is through the monetary response and the second through the fiscal response. This will have fiscal implications – in lower government revenue.”
This could lead to a steepening of the curve where short-term securities are well supported due to lower rate hike expectations, while longer securities remain under pressure due to the latent danger of increased borrowing. , the dealers said. Analysts expect the cut in excise duties on petrol and diesel to have an impact of around half a percentage point on headline CPI inflation, taking into account both direct and second-order effects.