Indian federal bond yields edged higher on Friday, with traders treading cautiously ahead of the next week's national budget that would detail government borrowing plan for the coming fiscal year. The yield on the benchmark 10-year bond ended at 7.88 percent after rising to 7.94 percent in early deals. It had ended at 7.86 percent on Thursday.
The yield has risen 29 basis points so far in February. Volumes were heavy at 73.40 billion rupees ($1.6 billion) on the central bank's trading platform. "The market will remain rangebound ahead of the budget. The gross market borrowing number is awaited and the market is divided on that number, but most expect it to come around current year's levels," said Parijat Agrawal, head of fixed income at SBI Funds Management.
"The 10-year yield is unlikely to breach the 8 percent mark in the immediate future as there is some buying interest at that level but in the long term yields are set to move up so there is no real accumulation by investors." India should begin to lower its fiscal deficit in the federal budget next Friday, but should not cut capital spending on infrastructure, a top government panel said on Friday.
The government will gradually wind down its growth-supporting stimulus over the 2010/11 financial year beginning on April 1, but will still need to borrow a record amount from the market, a Reuters survey of economists showed. The survey of 27 economists showed a median fiscal deficit of 5.6 percent of gross domestic product in 2010/11.
Gross market borrowing is forecast to rise to a record 4.61 trillion rupees in the next fiscal year from the current year's 4.51 trillion. Kotak Mahindra Bank said in a note bond supplies were likely to overstep demand by around 640 billion rupees in 2010/11.
Yields rose in early trade after the US Federal Reserve on Thursday made its first interest rate move since December 2008, raising an emergency lending rate it charges banks, but insisted borrowing costs would not rise for consumers or companies.
Dealers said this reinforced expectations for a 50 basis point rise in India's key rates at the April 20 monetary policy review. The benchmark five-year interest rate swap was at 7.05/08 percent from its previous close of 7.05/09 percent. In interest-rate futures on the National Stock Exchange, the March contract implied a yield of 8.2263 percent, while the June contract was not traded.