With the Union Budget less than a week away and talks of fiscal consolidation and partial withdrawal of stimulus gaining ground,financial markets are once again looking for direction. Indicating the uncertain times,the benchmark 10-year bond yields zoomed during the bygone fortnight,and held near 16-month highs over concerns of higher government borrowing for the next fiscal. The markets reading is that government borrowings will be close to last years level or even higher. As a result,de-facto pressure on banking system liquidity and the potential crowding effect of government borrowings is likely to be high. Bond yields have shot up over the last two weeks on comments by RBI governor Subbarao that net borrowings for FY11 is likely to be the same as those for FY10, said Abheek Barua,chief economist,HDFC Bank. Mirroring the yields performance,long-dated bond funds NAVs ended in negative region, said Amar Ambani,Vice President Research,India Infoline Ltd. Even volatile stock markets are looking for cues on the deficit,divestment and borrowings fronts. We expect gross borrowings of close to Rs 4,70,000 cr- Rs 5,00,000 cr in FY11 higher than the gross borrowing figure of Rs 4,50,000 cr last year. This serves as a reminder of the fact that large fiscal deficits come with an even larger memory it is difficult to shake off the impact of big fiscal deficits because of the drag created by debt servicing, Barua said. Said Citi India economist Rohini Malkani,We maintain our view of yields rising to 7.75-8% levels,although inflation breaching double-digits would result in more aggressive tightening and yields edging to 8.5% levels. There is concern on whether the RBI will be able to effectively manage the govts borrowing program (FY11) in an environment where credit is seeing an uptick.
