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    Debt bets may spike on realistic Budget 2015 numbers

    Synopsis

    This suggests the government is relying less on long-term market borrowing as it expects improvement in revenues later.

    ET Bureau
    MUMBAI: The Budget may have disappointed the debt market with the fiscal deficit estimate, reducing the possibility of an early rate cut, but investors are likely to bet big, driven by the government's realistic projections on deficit, disinvestment and infrastructure investment.

    The benchmark government bond yields may dip 10-15 basis points in four to six weeks as prices may move up, which could, in turn, lower corporate borrowing rates before any formal rate cut.

    "The Budget has showed enough signs for future growth although the fiscal deficit targets are extended by a year," said Ashish Vaidya, executive director and head of trading and asset liability management at DBS Bank. 'It negates any immediate rate cut possibility before April," he said. 'The bond market would rally, banking on falling inflation and stringent laws on black money and a realistic fiscal consolidation road map."

    The Budget aims to attain 3% fiscal deficit in the next three years and has pegged the next financial year’s estimate at 3.9%, wider than the expected 3.6%. The government plans to borrow Rs 4.56 lakh crore net of repayments by selling bonds in the market. This is to fund 82% of gross fiscal deficit next year versus 87.2% now.

    This suggests the government is relying less on long-term market borrowing as it expects improvement in revenues later. "The possibility of an interim rate cut is remote," said Ajay Manglunia, senior vice-president, Edelweiss Securities. The 10-year benchmark bond yield on Monday closed a tad higher at 7.74% compared with 7.72% on Friday as investors were tweaking trading positions.

    The RBI will announce its next bimonthly credit policy on April 7. Also, the incumbent benchmark bond will be replaced by a new one by around April. "Market movement (Monday) after the Budget may be due to market positioning ahead of expectations of the new 10-year government bond in April or May," said Dhawal Dalal, head, fixed income, at DSP BlackRock Investment Managers.

    "We expect the RBI to cut rates in the next monetary policy meeting." Falling G-Sec yields will help companies trying to tap the bond market. Those securities are normally priced with a spread to the benchmark bond yield. Debt investors are looking at the February retail inflation numbers on March 12. It is expected to be at 5-5.25% level against 5.11% a month ago. "The lower-than-expected gross supply, a qualitative improvement in Budget numbers, and a benign inflation outlook will keep markets constructive both near term as well as medium to long term," said Amit Tripathi, head of fixed income at Reliance Mutual Fund.











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