Budget Market Impact: Brutal gilt selloff continues on Budget borrowing shocker; mkt looks to RBI for help

The Reserve Bank of India’ s decision to announce a two-day variable rate reverse repo auction further soured market sentiment as traders interpreted the step as a signal of the central bank’s intent to nudge overnight money market rates close to the repo rate of 4 per cent.

The fresh selloff in the market comes after yield on the 10-year paper rose to a three-year high on Tuesday, hardening a whopping 15 basis points. Bond prices and yields move inversely.

So far in the current calendar year, yield on the 10-year paper has risen by 46 basis points.

In a rude shock to the market, the Centre on Tuesday announced a higher-than-expected fiscal deficit of 6.4 per cent of GDP for the next financial year and then a gross borrowing programme of a massive Rs 14.95 lakh crore.

Ahead of the presentation of the Budget, the market had expected the gross borrowing at around Rs 12 lakh crore-Rs 12.05 lakh crore as a last-minute switch of gilts between the RBI and the Centre lowered the redemption pressure for the next year, enabling the government to rein in gross borrowing.

Given that traders were skeptical of the market’s capacity to absorb gross bond supply of Rs 12 lakh crore, the actual borrowings are well and truly beyond the market’s absorptive capacity.

“Government borrowing always goes through because it is sovereign debt but it will now come at a huge price,” a dealer with a foreign bank said on condition of anonymity.

“Gone are the days when the RBI could cajole yields into heading lower by promising open market operations (OMOs). The only way to prevent yields from heading to 7.50 per in a short span of time is by the RBI announcing big bond purchases right now itself. The 2-day variable rate reverse repo is even unkinder for the market because it suggests that RBI in fact wants overnight rates to normalise. So, lose-lose for the bond market,” he said.

The runaway rise in sovereign bond yields does not bode well at all for the Centre’s push to boost investment as overall borrowing costs in the economy are benchmarked to government bond yields.

The rupee strengthened versus the US dollar, last trading at 74.68/$1 as against 74.79/$1 at previous close.

Dealers said that some degree of dollar sales by banks on behalf of exporters had buoyed the domestic currency.

The rupee had weakened sharply on Tuesday after the government announced the higher-than-expected fiscal deficit.