Pedestrians and traffic move past buildings in Mumbai. | Photo: Dhiraj Singh | Bloomberg
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Mumbai: India’s bond rally is predicted to stall as investors turn jittery about the government’s fiscal discipline before next month’s federal budget.

The 10-year yield will stay close to current levels at 6.98% by end of June, according to a Bloomberg survey, bringing an end to the slide of about 50 basis points over the past six weeks. Yields have tumbled as the Reserve Bank of India cut interest rates, Prime Minister Narendra Modi won a thumping election victory and slowing global growth spurred a global debt rally.

Bond traders have already shown signs they can be nervous about the nation’s financial health. Yields jumped the most in eight months on Feb. 1 when the government announced plans to borrow a record 7.1 trillion rupees ($101.8 billion) in its interim budget. With economic growth and tax collections worsening, markets are worried the administration may need to seek more funding to finance a wider budget deficit.

“Incremental economic data after February hasn’t been favorable and we’re keen to see whether the borrowing number is revised upwards” in July’s budget, said Badrish Kulhalli, head of fixed income at HDFC Life Insurance Co. in Mumbai. “The key concern for the market will be the budget and the fiscal deficit number.”

Market watchers are also scrutinizing technical indicators that are signaling bonds may have become too expensive after their six-week rally.

“We remain cognizant of the technical signals suggesting over-bought market conditions and potential pull back in yields,” said Dhawal Dalal, chief investment officer for fixed income at Edelweiss Asset Management Ltd. in Mumbai. “A higher-than-expected supply of bonds amid declining tax revenue projections and sticky fiscal deficit may result in further steepening of the yield curve.”

Once bond markets have digested July’s budget, there may be room for the rally to resume. Ten-year yields are poised to drop to 6.78% by the end of September, according to the Bloomberg survey of 10 traders and analysts.- Bloomberg

Also read: This is how Modi govt managed to keep 2018-19 fiscal deficit ‘artificially low’


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