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Bond Vigilantes in India Worry Too Much, Veteran Banker Says

Subhadip Sircar and Divya Patil
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Bond Vigilantes in India Worry Too Much, Veteran Banker Says

(Bloomberg) -- Ashok Gautam is betting that India will achieve its fiscal-deficit target this year. That makes him something of a rare breed among investors in the nation’s bond market.

Gautam, a banker for nearly thirty-five years, is counting on Prime Minister Narendra Modi’s administration’s past fiscal-track record, which shows it can generate funds to plug revenue gaps. That, he said, would remove a major impediment to a debt rally, which could see the benchmark 10-year yield slip to near a three-year low as the Reserve Bank of India cuts rates further.

“The government has the room to generate resources,” Gautam, executive director and head of treasury at IDBI Bank Ltd., said in an interview. “They have done it in the past, and going forward, they will use other avenues to mop up any revenue shortfall.”

Fiscal concerns have come to the fore as the government announced a surprise $20 billion tax break for companies last month amid already sluggish growth in tax revenue. Hamstrung by fears of larger market borrowings to bridge the gap, the nation’s benchmark bonds posted their first back-to-back monthly loss in a year in September, with the 10-year yield climbing 33 basis points in the period.

An internal government assessment has estimated a gross tax revenue shortfall of 2 trillion rupees ($28.3 billion) compared with the budgeted figures, the Business Standard newspaper reported last week.

For its part, Modi’s administration is making efforts to raise funds via divestments, including stake sales in major state-run oil companies, an electrical firm and a national air carrier, among others.

The government stuck to its Oct.-March borrowing plan despite the reduction in corporate taxes and shelving of a planned maiden overseas bond sale. It raised 850 billion rupees selling stakes in public-sector firms in 2018-19, exceeding the divestment target of 800 billion rupees.

“Hopes are high that total sales could outdo the budgeted target of 1.05 trillion rupees, a rerun of FY18, and help to narrow the anticipated tax shortfall,” Eugene Leow, a fixed-income strategist at DBS Bank Ltd. in Singapore, wrote in a recent note.

Gautam, who joined IDBI Bank this year after stints at Axis Bank Ltd. and State Bank of India -- the nation’s largest lender -- said the government could seek extra dividends from public-sector firms and institutions.

READ: India’s RBI Approves Record $24 Billion Payout to Government

Safer securities like government bonds made up about 664 billion rupees, or nearly 75% of IDBI’s total investment portfolio at the end of June. That’s after a high proportion of bad loans saw the central bank place curbs on its lending activities.

Gautam expects the 10-year yield to decline to 6.3% or lower by end-March, a decline of about 20 basis points from Wednesday’s levels. The yield slid to a three-year low of 6.25% in July.

Here are some of his views on India’s credit and currency market:We don’t expect spread between top-rated five-year company debt and sovereign bonds to compress until March due to illiquidity and credit risk of corporate bondsExpect Indian companies to continue raising funds through dollar bonds next year as borrowing costs offshore are attractiveExpects rupee to trade in 70-72 range to a dollar. The currency will see occasional gains due to foreign inflows. But the range is likely to be sustained due to pressure from the nation’s trade deficit.

(Updates with bond yields in 11th paragraph.)

To contact the reporters on this story: Subhadip Sircar in Mumbai at ssircar3@bloomberg.net;Divya Patil in Mumbai at dpatil7@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Shikhar Balwani, Anto Antony

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