India bond selloff picks pace on massive borrowing plan, shares up on spending thrust

A man looks at a screen displaying budget news, on a facade of the Bombay Stock Exchange (BSE) building in Mumbai, India, February 1, 2022. REUTERS/Francis Mascarenhas
  • FY23 gross borrowing seen at 14.95 trln rupees
  • 10-year bond yield surges 22 bps
  • Nifty, Sensex jump as metals stocks climb

BENGALURU, Feb 1 (Reuters) - India's benchmark bond yield surged on a selloff that picked pace on Tuesday as the government announced increased borrowings in its 2022-23 federal budget, while a plan to boost spending to revive the pandemic-hit economy lifted the stock markets.

The government is targeting gross borrowing of 14.95 trillion rupees ($199.90 billion) to support a bigger annual budget of 39.45 trillion rupees as it boosts investments in highways and affordable housing. read more

Finance Minister Nirmala Sitharaman said the fiscal deficit for the current financial year was expected to be 6.9%, slightly more than the 6.8% targeted earlier.

The benchmark 10-year bond yield rose 15 basis points (bps), posting its biggest single-day rise since May 11, 2020. So far this year, the benchmark has already risen 38 bps on top of the 56 bps in 2021.

Earlier in the session, the yield had surged 22 bps to 6.87%, hitting levels last seen in early July 2019. The rupee closed 0.2% weaker at 74.79 to the dollar.

"The sharp rise in bond yields post the budget announcement is testament to the surprise for bond markets, which now will need to absorb this large borrowing," said Aurodeep Nandi, India Economist and Vice President at Nomura.

Total government spending will be 4.6% more than the current year. The increased expenditure, amid mounting government debt and subdued private investments, comes as Asia's third largest economy looks to grow 8% to 8.5% in 2022-23 compared to 9.2% in the current fiscal year. read more

"The borrowing numbers are higher than even the highest estimate among market participants. It's not been offset with any announcement regarding overseas trading of Indian bonds or bond index inclusion," said A. Prasanna, head - fixed income research at ICICI Primary Dealership.

"This borrowing program will be very challenging for market in a year when RBI is expected to raise rates and curtail excess liquidity."

The bond selloff, analysts said, was also worsened by the absence of measures to ease inclusion of bonds into global indices.

Meanwhile, a growth-oriented budget pushed up stock markets, with the blue-chip NSE Nifty 50 stock index (.NSEI) gaining 1.37% to 17,576.85 and the S&P BSE Sensex (.BSESN) adding 1.46% to 58,862.57.

"The significant focus on capital expenditure...has a multiplier effect on the economy," said Rupen Rajguru, head of equity investment and strategy, Julius Baer India.

The budget, which also targets sectors including defence, green energy and transport, lifted the Nifty Metal index (.NIFTYMET) by 4.5%.

The Nifty Infrastructure Index (.NIFTYINFR) rose 1.1%, while the Nifty Bank Index (.NSEBANK) climbed 1.4%.

Cigarette maker ITC (ITC.NS) jumped 3.4% as analysts said fears of a tax hike on tobacco products had abated.

Shares of battery makers Amara Raja Batteries (AMAR.NS) and Exide Industries (EXID.NS) rose as much as 2.4% and 2.9%, respectively, before cutting some gains at close, after Sitharaman announced that a battery swapping policy will be launched.

($1 = 74.7870 Indian rupees)

Reporting by Chris Thomas and Savio Shetty; additional reporting by Rama Venkat; Editing by Arun Koyyur

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