The Hindu Business Line : Jaswant breathes new life into debt markets

THERE was good news for the bond markets at long last, after the Finance Minister on Tuesday announced a lower borrowing target for the fiscal year 2004-05 in the interim Budget, in the wake of a lower fiscal deficit as a percentage of the GDP.

The Minister's announcement, that the fiscal deficit at Rs 136,452 was at 4.4 per cent of the estimated GDP, gave a fillip to the debt market which has been in a slump over the past few weeks.

While bond prices immediately rallied by over 50-60 paise across some maturities, most appetite seemed to be building up only in the long-term papers, while prices in shorter and medium term segment moved up marginally as well.

According to Mr Vivek Ahuja, Head-Fixed Income Research, Tower Capital Securities, " We may see some amount of upward movement in prices. The yield on the benchmark 10-year paper will continue to range between 5.19 per cent and 5.25 per cent. The market at this point does not believe that a bank rate cut is likely in the near future, so we don't expect a major rally from here on".

The Government has already completed over 95 per cent of its borrowing target and the remaining should be completed by the end of February 2004. For the fiscal year 2004-05 the net-borrowings of the Government have been pegged lower at Rs 90,502 crore, as against Rs 92,000 crore in the current fiscal, dealers said.

Although, the market has been ridden with apprehensions over a possibly higher inflation, coupled with fears of a hardening in global interest rates, there is a feeling that the latest announcements from the Government may have given a boost to the bond market at least for the next few weeks.

One senior banker with a leading public sector bank said, volumes in the market in the past few weeks have been abysmally low. But now some buying interest is expected to emerge. The system is flush with liquidity upwards of Rs 40,000 crore and it needs to be deployed profitably.

"How long can people put their funds in the overnight repo for 4.50 per cent. Instead if I invest in a 10-year maturity I will at least get a pick-up of 75 basis points", he said.

Analysts contend that the market is veering from its `extremely cautious' mode in the recent times, to a more `cautiously optimistic mode'.