Investor fears soothed on India’s deficit stance

Mumbai (Bloomberg): Sovereign bonds in India rallied after a government adviser said that Prime Minister Narendra Modi’s administration will stick to its fiscal deficit path, easing concerns of a widening in the gap to finance spending.

Traders have been fearing a possible breach of the 3.4 per cent fiscal deficit aim announced in February as the government seeks to boost growth from a five-year low. “The key concern for the market was in light of slowdown in growth and tax collection if there was going to be slippage,” said Badrish Kulhalli, head of fixed income at HDFC Life Insurance Ltd. “The market took a cue from the statement made by the chief economic adviser regarding commitment to stick to fiscal consolidation.”

There’s a risk of crowding out investment in case of widening the budget gap, Chief Economic Adviser K.V. Subramanian told reporters after the release of the economic survey. The benchmark 10-year bond yield dropped 6 basis points to 6.77 per cent, extending the decline since the end of April to more than 50 basis points.

The rupee also gained, partly also helped by a court ruling allowing the sale of Essar Steel to ArcelorMittal. The sale is expected to involve about $6 billion of inflows to the forex markets. The currency gained as much as 0.3 per cent against the dollar.