Bond yield falls sharply as government cuts size of extra borrowing

The yield on benchmark 10-year government bonds fell sharply as the Union government said it was reducing the size of its additional borrowing from the market. 

Bond market dealers said the announced cut in extra borrowing by Rs 300 billion in 2017-18 comes as solace, indicating confidence about revenue collection and resolve on fiscal discipline. 

The room for yields to fall further is limited. The market is concerned over a rise in inflation and the impact of uptick in crude oil prices, dealers said. The yield on the 10-year bond maturing in 2018 fell to 7.22 per cent, from 7.38 per cent on Tuesday.

ICICI Bank in a research note said attention now shifts to the Union Budget for the fiscal deficit figures and outlook for government borrowing in the coming financial year. The head of treasury with a foreign bank said panic had ebbed from the market. The yields are now at a level prior to the announcement on December 27 for additional borrowing of Rs 500 billion. Even prior to that date, the market had factored in extra borrowing of Rs 150-200 billion.

The government had on December 27 announced it would make the additional borrowing of Rs 500 bn during 2017-18 through dated securities. However, there would have been no change in the net borrowing as envisaged in the Budget.

Economic affairs secretary Subhash Chandra Garg now says the government has reassessed its requirement, taking note of revenue receipts and expenditure pattern. The finance ministry stated additional borrowing of only Rs 200 bn in government securities would be adequate.