Mumbai: Bonds climbed for a second day in India after the central bank’s record 1.76 trillion rupees ($24.4 billion) payout to government coffers eased worries over the administration meeting its fiscal-deficit target. Stocks and the rupee also gained.
The transfer, approved by the Reserve Bank of India’s board late Monday, far exceeds the administration’s budget estimate of 900 billion rupees as dividend payment from the authority this year.
The windfall is timely boost for a government that is looking to spur economic growth. Finance Minister Nirmala Sitharaman last week took a slew of steps to stoke demand, including hastening capital infusion in state lenders even as she strives to meet a narrower fiscal gap goal of 3.3% of gross domestic product.
“The enhanced transfer gives the government greater flexibility in its fiscal math -– in the context of meeting the on-budget target of fiscal deficit, which is challenging against a weak start to tax revenue growth,” Morgan Stanley analysts including Upasana Chachra wrote in a note.
The government is said to mull cut in borrowings and meeting its fiscal deficit aim with the central bank transfer, people with knowledge of the matter said.
The yield on the benchmark 10-year debt slid six basis points to 6.42% after dropping as much as 13 basis points. It fell nine basis points Monday after Sitharaman resisted the pressure to deliver a big fiscal stimulus that businesses had been calling for.
The rupee rose 0.3% to 71.78 per dollar and key equity indexes were modestly higher after logging their best day in three months on Monday.
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Fiscal Slippage
The twin announcements are a “conducive combination” for equities and bonds, said Chakri Lokapriya, chief investment officer at TCG Asset Management, which oversees about $3 billion of assets.
“The RBI’s cash transfer in essence infuses liquidity and lowers borrowing cost for companies as it allows transmission of rates by banks,” he said.
Not all analysts are sounding the all-clear for Indian assets just yet.
Kotak Mahindra Bank said the risk of fiscal slippage remains as revenue shortfall from the goods and services tax may be 1.5 trillion rupees. The pressure will intensify if growth in direct-tax collections trails expectations, the lender said.
“While the initial reading could be positive for government bonds, fiscal slippage risks will continue to weigh on yields,” the bank said in a note. – Bloomberg
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