Indian Bonds Fall Due to Modi Government’s Announcement of Taking Loans

The price of Indian Bonds drop heavily due to government decision of higher borrowing. The Modi’s government has raised the limit of taking loans to cover the revenue reduced due to the recession caused by Coronavirus. The government has decided that a loan of Rs 12 lakh crore will be taken in the current financial year as against Rs 7.8 lakh crore fixed earlier.

That is, the government has increased the loan limit by more than 50 percent. But this announcement by the government has led to the biggest fall in benchmark sovereign bonds in India in more than three years.

The yield on the 10-year bond rose 22 basis points to 6.19 per cent, the biggest growth since February 2017. The stock markets also gained momentum after the government announced this large fiscal stimulus to support the economy.

New message for RBI

The rise in lending is a new message to increase support for RBI’s debt market. For the first time in 4 decades, the economy is expected to decline before the government, due to which foreign investors have withdrawn huge amount of money from the debt market. There is also a risk that corporate borrowers will exit the debt market or will have to pay higher financing costs. Yield on the new 10-year sovereign bond, which began trading at a coupon rate of 5.79% on Friday, rose 18 basis points to 5.89%.

More Government’s Shock for Loan Bond Market

Experts believe that it would not be wrong to say that the government’s loan increase has come as a shock to the bond market. Now RBI will have to increase open market purchases or implement Operation Twist program more and more. The central bank has bought a total of Rs 910 billion in debt in the secondary market in four weeks and recently resumed the Operation Twist program, in which it has sold bills and bought bonds.

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The government’s target may remain unfinished, according to a government official, with the fiscal gap expected to be around 5.5 per cent of GDP in 2020-21. At the same time, RBI has no plan to buy debt directly and the government can stay on borrowing less than the revised target of Rs 12 trillion.

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