Budget 2014: Bonds, rupee give up gains; deficit target seen as 'challenging'

AppId is over the quota
AppId is over the quota
MUMBAI: Indian bonds and the rupee currency ended weaker on Thursday, retreating from earlier one-week highs, on scepticism about whether the new government of Prime Minister Narendra Modi can achieve its ambitious fiscal deficit target.

Bond prices and the rupee had initially rallied after Finance Minister Arun Jaitley stuck to the fiscal deficit target of 4.1 per cent of gross domestic product for this fiscal year set by the previous government.

The government also revised upwards the market borrowing to a gross 6 trillion rupees ($100.42 billion) from 5.97 trillion rupees in the interim budget, well within analysts' expectations.

But some of the optimism faded as Moodys' Investors Service and Fitch Ratings expressed doubts whether the government could meet that target, pointing to the lack of specific details about ways to meet spending and revenue projections.

"The budget was a bit of a disappointment in terms of no clear roadmap for reduction of subsidies or how the tax revenue will be achieved," said Bekxy Kuriakose, head of fixed income at Principal PNB Asset Management.

The benchmark 10-year bond yield at one point fell as much as 9 basis points on the day to 8.64 per cent, its lowest since July 3. The yield closed up 4 basis points on the day, at 8.77 per cent.

The partially convertible rupee earlier rose as high as 59.57 per dollar, its strongest since July 3. The unit ended at 60.19/20, versus the previous close of 59.75/76, down 0.8 per cent on the day,

Traders said there was also some paring of positions ahead of Friday's 150-billion-rupee ($2.49-billion) bond auction.

"Inflation will be key, going ahead and supply will remain a concern," Kuriakose added.

In his speech, Jaitley announced a slew of proposals, including raising the limit on foreign direct investment in defence and insurance ventures to 49 per cent from 26 per cent, which is expected to help the rupee in the medium- to longer- term.

The tight fiscal deficit targets are expected to help keep a lid on prices, a critical factor in a country where consumer price inflation was 8.28 per cent in May, and could potentially allow the Reserve Bank of India some room to cut interest rates.

However, Moodys' and Fitch said the government would need to provide more details of how it would meet the fiscal deficit target.

"From a ratings perspective, it is mildly positive to see there's a roadmap, but the lack of details gives us pause," Moody's sovereign rating analyst Atsi Sheth told Reuters in a telephone interview.

"The intent appears to be there, but the measures have not been really thought through yet," Sheth added.

Irish GDP revision eases debt target

Better figures: Irish Finance Minister Michael Noonan's job of deficit reduction has now become much easier Research and development (R&D) costs and illegal activities have been added into Ireland's GDP for the first time, enlarging the economy by 10bn euros ($13.6bn; £7.9bn).

This 6% increase in national income numbers gives the government more scope to cut its austerity programme.

EU rules allow R&D investment, illicit gambling, drug dealing and activities linked to prostitution to be included.

Separate figures showed the economy grew 2.7% in the first quarter of 2014.

And the sharp contraction in the economy in the final three months of 2013 was revised to show that it shrank less than thought, by 0.1% rather than 2.3%.

The GDP recalculation does not affect the growth figures, because previous years have also been recalculated.

Continue reading the main story

It looks as though the finance minister can bring the deficit down below 4% of GDP by the end of the year and hit his deficit target of 3% easily by the end of 2015”

End Quote Conall Mac Coille Chief Economist, Davy In October's budget, Finance Minister Michael Noonan outlined 2bn euros ($2.7bn) programme of tax hikes and spending cuts to meet a deficit target of 3% of GDP by the end of next year.

Last month, he suggested that the enlargement of GDP under the new EU rules could mean the programme might be reined back, as the debt and deficit will appear smaller when measured against the new "larger" economy .

Revisions

Conall Mac Coille, chief economist at Davy Group, Ireland's biggest securities firm, estimated that the new numbers meant Ireland's debt-to-GDP ratio stood at 116% and its deficit at 6.7% of GDP at the end of last year .

Previously, those figures had been 123.7% and 7.2%.

He said: "It's a measurement issue rather than a real improvement. But since exchequer returns were outperforming anyway, it looks as though the finance minister can bring the deficit down below 4% of GDP by the end of the year and hit his deficit target of 3% easily by the end of 2015, without having to do very much at all in the way of austerity."

Mr Mac Coille estimates that R&D expenditure contributed more than 90% of the extra GDP, with illegal activities making up the rest.

Illegal activity is calculated using EU guidelines.

There has been a raft of encouraging economic figures coming out of Ireland in recent months.

Much of the growth is coming from exports, which grew 1.8% in the first three months.

Even though personal consumption fell 0.1% in the first quarter, the unemployment rate now stands at 11.6%, the lowest level since April 2009.

There have been some 30bn euro in tax hikes and spending cuts since the property bust of 2008 was followed by a banking collapse. Ireland was forced to turn to the IMF and the European Union for a 78bn-euro loan, which came to an end in December.