Traders Wary of Modi's Budget Math as India Bond Losses Persist

Bond traders in India are skeptical about the government’s efforts to fund a wider-than-estimated budget deficit, with Morgan Stanley and ICICI Securities Primary Dealership Ltd. seeing no immediate relief for a market battered by the worst selloff in two decades.

Prime Minister Narendra Modi’s government in Thursday’s federal budget said it will aim for a budget shortfall of 3.3 percent in the year starting on April 1, wider than its previous goal of 3 percent. Debt sales of 4.62 trillion rupees ($72 billion) will help fund 74 percent of the gap, with asset sales and Treasury-bill auctions contributing the rest, the budget documents show.

The market is having trouble digesting the proposal of relying on alternate sources to raise cash. Morgan Stanley called the plan “aggressive” and said there’s concern that the government may bump up borrowing toward the end of the next fiscal period as they did in the current 12-month period.

Here’s what happened. The government had budgeted net market borrowing of 3.48 trillion rupees and bond buybacks of 750 billion rupees in February last year. On Thursday, Finance Minister Arun Jaitley upped the bond sales to 4.02 trillion rupees while cutting repurchases to 570 billion rupees.

“The overall fiscal deficit is higher,” said Naveen Singh, head of fixed-income trading with ICICI Securities in Mumbai. “That’s putting some kind of doubt in the minds of players. It’s not going to be easy for the government to fund this kind of deficit.”

The yield on benchmark 10-year debt climbed 26 basis points last week, taking the rout into the seventh month, the longest stretch since 1998.

“The continued bearishness has sucked the joy out of bond buyers and the market continues to reel under supply-demand imbalance,” said Arvind Chari, head of fixed income and alternatives at Quantum Advisors Pvt.

Following are comments from other strategists:

Morgan Stanley (Jesper Rooth, fixed-income strategist)

• “The assumptions on financing from sources other than government bonds look relatively aggressive”
• The government’s plan to buy back nearly one trillion rupees of maturing bonds (out of 2.3 trillion rupees in total) and issue around 6 trillion rupees implies flat net issuance versus FY2018. This seems ambitious in an environment of >10% nominal GDP growth
• We estimate FY2019 issuance to be closer to 6.4 trillion rupees, using our economists’ estimates of a 3.3 percent deficit, but for alternative sources of financing to provide less of a boost.”

Edelweiss Securities Ltd. (Jagdeep Kannarath, fixed-income analyst)

• The shortfall in the buyback target for FY18 led to borrowings, net of buyback, contributing to 68 percent of the deficit financing vs a budgeted 64 percent
• “This proportion is much lower at 62 percent for FY19, which might be viewed as aggressive and leaves room for slippage toward the end of the next year as well.”