India bond yields surge on additional borrowing, shares rise post budget

(Updates with bond market move, details on budget)

BENGALURU, Feb 1 (Reuters) - Indian bond yields jumped sharply on Monday after the government, in its annual budget presentation, announced plans to raise additional funds from the market over the next two months to bridge a deficit, even as shares rose on promises of reviving economic growth.

Finance Minister Nirmala Sitharaman said the government’s fiscal deficit for the current fiscal year to March 2021 is likely to reach 9.5%, compared with the budget estimate of 3.5%, and the government will borrow an additional 800 billion rupees from the market by end-March.

The benchmark 10-year bond yield rose as much as 17 basis points to 6.10% from the day’s low. At 0832 GMT, it was trading at 6.05%.

A “substantially higher-than-expected” expenditure pushed fiscal deficit for fiscal 2021 and 2022 well above projections, said Aditi Nayar, principal economist at rating agency ICRA, adding that yields were expected to sustain a hardening bias, in the absence of frequent open market operations.

Sitharaman also announced a slew of measures to revive the pandemic-hit economy and higher capital expenditure, sending the blue-chip NSE Nifty 50 up 4% and the S&P BSE Sensex up 4.5%, after six sessions of losses in the run-up to the budget.

The finance minister proposed doubling healthcare spending, a vehicle scrappage policy, recapitalisation of public-sector banks and divestment of some state-owned lenders, aiming to bolster an economy that plunged into its deepest recorded slump amid the virus outbreak.

“The budget has ticked the boxes on the growth side, with infra capex increase of around 34% on a year-on-year basis, which is a very healthy sign, a good roadmap on divestment and monetisation of assets of state owned enterprises,” said Rupen Rajguru, head of equity investment and strategy, Julius Baer India.

The Nifty Auto index climbed 4.6%, while the Nifty PSU Bank index, which tracks state-run lenders, jumped 7.1% after Sitharaman said India would set up an asset reconstruction company to take over toxic assets.

Insurers HDFC Life Insurance Co and ICICI Prudential Life Insurance Co rose between 5% and 6% after India raised the foreign investment limit in the insurance sector to 74% from 49%.

Gains in ICICI Bank and IndusInd Bank after quarterly earnings lifted the Nifty Bank index 7.3%.

India’s economy is seen clocking robust growth of 11% for the coming fiscal year, after likely contracting 7.7% in the current fiscal year to March 31, an annual economic survey showed on Friday.

Broader Asian share markets also rallied on hopes of a respite to hard-hit hedge funds, with MSCI’s broadest index of Asia-Pacific shares outside Japan up 1.4%.

Reporting by Chris Thomas in Bengaluru and Swati Bhat in Mumbai; Editing by Shounak Dasgupta