Rupee slides, bond yields rise on Budget woes

Piyush Goyal’s maiden Budget has had the unintended effect of puncturing the rupee and causing bond yields to rise sharply on fears of inflation.

The Indian currency has depreciated almost 1% against the dollar after the Budget announcement and is inching back down toward the 72 mark. On Monday, the rupee closed 56 paise down at 71.80, as against 71.08 on January 31, the day before the Budget.

Investors are worried about the rising fiscal deficit – the excess of government expenses over revenues – flagged in the Budget. A higher deficit reduces the chance that international rating agencies will upgrade India’s debt, meaning that borrowing costs will remain high and reduce companies’ profitability. Foreign investors sell Indian company shares and repatriate their realisations in dollars, leading to a shortage of dollars in the local market and a glut of rupees, leading to a fall in the Indian currency.

On the other hand, the yields of the government’s 10-year bonds have surged by over 2.53% in past two trading sessions to close at 7.672% on Monday. Bond yields rise – and prices fall – when investors expect inflation to rise, leading to a rise in central bank interest rates.

“The interim Budget…has raised expectations of a rise in inflation with the tax exemptions and direct cash transfers being provided by the government,” said Manisha Sachdeva, Associate Economist with Care Ratings.

According to the analysts, higher market borrowings announced in the interim budget have to an extent exerted upward pressure on the yields, along with rising oil prices. In the budget estimates of 2019-2020, Goyal pitched the market borrowings at Rs 4.48 lakh crore from Rs 4.47 lakh crore in the revised estimates of 2018-19.