Sovereign bonds rallied after Finance Minister Nirmala Sitharaman said India will borrow overseas, a move that will help ease the pressure on the local debt market to finance the government’s budget deficit.

The administration will set the budget deficit target for the current fiscal year at 3.3% of gross domestic product, according to people familiar with the matter. That’s lower than the 3.4% estimated in February’s interim plan.

Prime Minister Narendra Modi has few options left as a slowing economy crimps tax revenue, while investors have been concerned about his plans to borrow a record 7.1 trillion rupees this fiscal year, a target Sitharaman left unchanged.

“Besides broadening the bond market, I think this should ease some of supply overhang on the domestic market and ease upward pressure on yields,” said Prakash Sakpal, an economist at ING Groep NV in Singapore. “Another goods news from the budget is that the government isn’t raising it’s borrowing plan.”

The yield on benchmark 10-year bonds dropped 13 basis points to 6.62%, while the rupee erased losses and was trading steady at 68.5025 per dollar. Yields have declined by more than 50 basis points since April-end as the central bank cut rates thrice this year and continued to buy bonds on the open market.

(For full budget coverage log on to livemint.com)

First Published: Jul 05, 2019 16:53 IST