10-yr bond yield rises on concerns FY16 fiscal gap may widen

The 10-year Government bond yield rose today on concerns fiscal deficit for this fiscal may widen and government may increase its market borrowing after the Seventh Pay Commission recommended a 23.55 per cent hike in salaries and pensions of Central Government employees.
The yield of 10-year bond - 7.72 per cent-2025 - ended at 7.69 per cent from previous close of 7.67 per cent. It touched an intra-day high of 7.70 per cent.
The recommendations, presented yesterday, would involve an additional outgo of Rs 1.02 lakh crore a year. The recommendations will come into effect from January 1, 2016.
"There are concerns that Government may find it difficult to meet its fiscal deficit target for this year (FY16) due to these (Seventh Pay Commission) recommendations," said a dealer with a state-owned bank.

The Government has set 2015-16 fiscal deficit target at Rs 5.55 lakh crore, or 3.9 per cent of gross domestic product (GDP). Under the fiscal consolidation path, the Government will bring down fiscal deficit to 3.5 per cent in 2016-17 and 3 per cent by 2017-18.
In the first six months of this year fiscal deficit, gap between Government's expenditure and revenue, stood at Rs 3.78 lakh crore, or 68.1 per cent, of the budget estimate (BE) for the whole year.

"Market is worried that this additional burden of Rs 1.02 lakh crore will be funded by higher Government borrowing, which will come in the last quarter," said another dealer with a private-sector bank.

Government has set a market borrowing target of Rs 6 lakh crore in the current fiscal. However, some dealers termed the concerns as a knee-jerk reaction of the bond market.
"The Government may moderate some of the recommendations and so I don't think there would be any impact on fiscal deficit," said chief dealer with a public lender.
After the recommendation were submitted, Finance Secretary Ratan Watal had told reporters his Ministry can handle the financial implications of recommendations and will work out modalities for their implementation.
"There are challenges, we will face that... It's not going to impact this fiscal. By the time it is implemented, it goes into next financial year and our growth prospects are good, our economy is pretty robust, we will handle this."

The pay panel's recommendations will benefit 47 lakh Central Government employees and 52 lakh pensioners.