Bond yields may rise, rupee upside capped, with all eyes on budget

MUMBAI (Reuters) - Indian government bond yields may rise this week as investors prepare for another year of record government borrowing, while the rupee’s rise may be capped amid major central bank meetings.

FILE PHOTO: A broker reacts while trading at his computer terminal at a stock brokerage firm in Mumbai, India, February 1, 2020. REUTERS/Francis Mascarenhas

The government is expected to announce a record gross borrowing of 16 trillion rupees ($196.28 billion) for 2023-24 when it presents the federal budget on Feb. 1, according to a Reuters poll of economists. A separate poll has pegged the fiscal deficit target at 6% of gross domestic product.

Reuters reported on Friday the country was likely to keep its gross market borrowing below 16 trillion rupees ($196 billion) for 2023/24 as it does not want to destabilise the bond market with any negative surprises.

Traders expect the 10-year yield to test the 7.50% level as fresh borrowings are announced.

“Any gross figure below 15.50 trillion rupees could see some positive reaction,” said Raju Sharma, chief investment officer – debt at IDBI Mutual Fund.

India’s benchmark bond yield ended at 7.3874% on Friday, having gained 4 basis points (bps) last week after rising 5 bps in the week prior. Market participants expect the benchmark bond yield to trade in the 7.30%-7.50% band this week.

Apart from the overall borrowing plan, the quantum of funds to be raised via green bonds in 2023/24 is another key number.

The government raised 80 billion rupees in its first-ever green bond issuance last week by selling five- and 10-year bonds at a coupon of 5-6 basis points lower than prevailing yields.

However, a large share of the issue was bought by local investors.

“If these bonds are going to be taken by only local players, then it does not make much sense to increase the ticket size of these papers,” a trader with a private bank said.

The Indian rupee ended 0.5% lower at 81.5225 per dollar last week, snapping a run of two weeks of gains.

The currency is expected to trade between 80.90-81.70 per dollar this week, though there is the risk of volatility with three major global central bank meetings and India’s federal budget on the cards.

Alongside the government’s fiscal stance, forex traders will watch for any incentives to entice foreign investments and any update on India’s inclusion in global bond indices, analysts said.

The Fed meeting would also be a big driver for the rupee’s direction, but the currency could get support from expectations that the U.S. central bank is possibly near the end of its hiking cycle, traders said.

“The rupee may firm past 81,” but we will have to see if the RBI will let it, said Raj Deepak Singh, research analyst at ICICI Securities. Its near-term high of 80.90 will likely become a resistance.

Reporting by Dharamraj Dhutia and Anushka Trivedi; Editing by Savio D’Souza