How will the debt market react to the budget?

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MUMBAI: Inflation Control, Global Bond Index and Gross Federal Borrowing: This triad will weigh on debt markets on Monday when Finance Minister Nirmala Sitharaman announces the budget, which could immediately cut yields by 10 to 15 basis points through measures that Street sees as positive.

A basis point is one hundredth of a percentage point.

“The debt market was probably bracing for a negative surprise,” said Jayesh Mehta, India’s national treasurer at Bank of America. sovereign bonds is likely, which will reduce funding costs.

The benchmark index fell a little higher at 5.95% on Friday. The gauge has traded in a narrow three basis point band over the past week.

“Speculation is rife that the budget could alter inflation targeting as the government is willing to live with higher growth but high inflation,” said Naveen Singh, head of trading at ICICI Securities. PD. “In the short term, this is positive for the bond market.”

The Reserve Bank of India (RBI) is supposed to keep inflation at 4%, with a tolerance of 200 basis points on either side. The mandate expires at the end of March this year.

The one-month Overnight Indexed Swap (OIS), a derivative indicator of future rates, returned 3.51%, five basis points lower than its short-term peak two weeks ago.

When bond yields rise, prices fall.

The proposed inclusion of India in the global bond index has already been mentioned in the last budget. He didn’t make much progress amid tough negotiations.

“If the government sets a clear timetable for the inclusion of India in the bond index, it would trigger a rally in the GSEC market,” said Vijay Sharma, senior executive vice president of PNB GILTS. “The mere declaration of intent won’t bring any joy, but what will is a concrete roadmap ensuring the liquidity of these papers – a key factor for international investors.”

But, any relief may well be short-lived if not backed by follow-up action.

Global investors willing to hold Indian sovereign papers from a global index are demanding the deployment of Euro Clear, an international settlement platform for securities transactions. India has not yet approved the use of the platform which does not reveal the names of investors.

Previously, the authorities had created a dedicated pool known as the Fully Accessible Route (FAR), where non-resident and foreign investors could invest in certain sovereign bonds, with no upper limit. There are a dozen sovereign bonds included in the category.

The market estimates the government’s gross borrowing plan in the range of Rs 10-10.5 lakh crore. Anything less is likely to trigger a near-term rally in bonds.

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