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How government borrowing plan may impact bond market

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MUMBAI: North Block Monday sought to haul Indias sovereign bond market out of its worst spell of selloff in about two decades after it unveiled a surprisingly austere borrowing calendar for the first half of FY19.

Bond yields, which have firmed in the recent past after a surfeit of debt paper induced state-run banks to stay away from purchases, are likely to decline 15-20 basis points and revive the value of treasury holdings as lenders affected by pronounced mark-to-market losses.

“Three key factors will trigger a rally in the bond market,” said Vijay Sharma, executive vice president for fixed-income at PNB Gilts, which is engaged in the central banks weekly auction of government bonds. “After a long time, the government will borrow less in the first half of the financial year addressing the immediate supply side surge, while the proposed shorter maturity and floating rate bonds will help create additional demand. Also, increased allocation to National Small Savings schemes will consequently cut the overall capital market borrowing.”

New Delhi Monday said that its borrowings up to September would amount to about 48% (excluding bond buybacks) of the overall target for the financial year. Normally, the government proposes to complete 60% of the targeted borrowing in the first six months, and expectations were higher for the first half of FY19, with the country facing parliamentary polls.

The governments gross borrowing is pegged at Rs 6.05 lakh crore for FY19, compared with Rs 5.99 lakh crore this financial year.

The 10-year benchmark yield could now well move toward 7% once inflation expectations begin to moderate, reversing the broader trend, dealers said.

“The bond market has got a boost and will rally firmly now,” said Sandeep Bagla, associate director at Trust Capital, which deals in gsecs. “Introduction of shorter maturity papers will reduce the duration risk while creating good demand from fund managers and banks as well. There will be renewed interest from investors across the board from Tuesday.”

The benchmark bond yield surged to as much as 7.77% in February pulling prices down amid concerns over fiscal slippages and muted demand. In a span of six months ending February, government bond yields surged about 100 basis points.

State-owned banks, which own sovereign debt in bulk, have been shying away the government bond market. Many of them incurred huge mark-to-market losses.

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