India bonds slump as government raises deficit target, shares whipsaw

MUMBAI (Reuters) - India's benchmark 10-year bonds slumped on Thursday after the government set a higher-than-expected fiscal deficit target for the year starting in April.

Indian shares also fell briefly after the government imposed a long-term capital gains tax, but major indexes later clawed back into positive territory.

In its budget unveiled earlier in the day, the government said its fiscal deficit would be 3.3 percent of gross domestic product in 2018/19, higher than market expectations of 3.2 percent and compared with a previously projected 3.0 percent.

The yield for the benchmark 10-year bond rose 9 basis points to 7.50 percent after the deficit forecast. It had closed at 7.43 percent on Wednesday.

The broader NSE share index fell as much as 1.3 percent after Finance Minister Arun Jaitley said a long-term capital gains tax would be imposed on equity investments above a certain amount. But by 0800 GMT it was up 0.3 percent.

India currently does not tax capital gains on equities if the investments were made more than a year earlier.

The rupee weakened to 63.78 per dollar from around 63.5950 before Jaitley's speech. It had closed at 63.58 on Wednesday.

Still, analysts said the deficit was not as wide as some investors had initially feared, and noted the budget included a number of incentives for key areas of the economy such as agriculture, as widely expected.

Some investors had feared a populist budget loaded with spending as Prime Minister Narendra Modi's ruling coalition gears up for re-election in 2019.

"It was no surprise to us that they relaxed the deficit targets," said Shilan Shah, an economist for Capital Economics in Singapore.

"They have basically struck middle ground between fiscal prudence and election spending."

The government expects India's economy to grow 6.75 percent in the year to March, although it is expected to pick up to 7.0 to 7.5 percent in the next fiscal year, once again becoming the world's fastest-growing economy..

Growth has been hampered by a chaotic rollout of a goods and service tax last year and a shock move to ban high value currency notes in late 2016.

(Reporting by Rafael Nam and Savio Shetty; Additional reporting by Vishal Sridhar; Editing by Kim Coghill)