Budget could trigger a rally in G-secs

China’s PBOC to pump $173 bn into economy

China's central bank said it would pump 1.2 trillion yuan ($173 bn) into the economy as it ramps up support for a nationwide fight against the coronavirus. The People's Bank of China (PBOC) said it would launch a 1.2 trillion yuan reverse repurchase operation on Monday to maintain "reasonable and abundant liquidity" in the banking system.

The budget could trigger a short-term rally in bonds, with relief stemming from the absence of additional borrowing for the remaining part of the fiscal year and gross issuance largely in line with market expectations, said experts. Bonds are likely to rally when markets open on Monday.

The FY21 budget pegged the FY20 (revised estimate) deficit at 3.8 per cent of GDP and FY21 at 3.5 per cent. This overshoot was backed by evoking the 'escape clause' under the Fiscal Responsibility and Budget Mechanism (FRBM), which allows for a 0.5 per cent deviation on targets on certain conditions.

Abhishek Goenka, founder, IFA Global, said, "The FY21 gross borrowing at Rs 7.8 lakh crore and fiscal deficit at 3.5 per cent of GDP is in line with what the markets were pricing in. Therefore, the bond markets may not be as unhappy with the budget as the equity market."

Nomura, in its report on the budget, said, "The budget should be neutral to slightly positive for bonds, with some relief stemming from the absence of additional borrowing in FY20 and gross issuance largely in line with our forecasts (Rs 7.8 lakh crore versus Nomura forecast of Rs 7.6-7.9 lakh crore). Continued fiscal consolidation in FY21 could be viewed by markets as positive for the Indian rupee, but the weak external environment remains a considerable headwind."

The government also announced several measures intended to deepen the bond market, such as increase in foreign portfolio investment (FPI) limit in corporate bonds to 15 per cent from 9 per cent, allowing NRIs to participate in G-Secs, cut in withholding tax on overseas listed corporate bond issuances and a debt ETF for government securities.

Radhika Rao, senior vice president & economist, DBS Group Research, said, "Bond supply and optimism that ongoing tweaks could pave the way for a bond index inclusion eventually, will be construed as positives by the bond markets. Slippage in the fiscal targets was largely priced in, we don't expect a lasting impact on the GSec yields. Small savings collections are expected at Rs 2.4 lakh crore in FY21, broadly steady from FY20 and continues to remain a key source of support on the financing end. Notably, the global environment is bullish for bonds, as global central banks maintain loose monetary policies and outbreak of the coronavirus adds to the downdrift in global yields."