India’s budget and bond market unrest

The current situation regarding India bond market and its aggressive fiscal plan.
By Markets Chimp

2/24/18 11:00 PM

Fiscal stimulus can be really tough sometimes, and India is a very clear case. The above chart depicts India’s fiscal spending versus its inflation rate. The country’s budget, which has aggressive expansionary features, is building in rising inflation risks in the Indian economy down the road. Inflation jumped in a real quick pace, up from nearly 1.50% last July to reach as high as 5.07% now. The situation was even worsened by the genuine rise in yields elsewhere in the world earlier in February. However, the sell-off in the nation’s bonds was directly triggered by the central bank’s hawkish tone in recent meetings, showing worries over inflation creeping out its target (4%). Anxiety seen in India’s bond market is attributable to conflicting government actions. Government had initially announced that borrowing will stand at INR3.48 trillion and bond repurchases at INR750 billion in February last year. However, in February 2018 the borrowing ceiling was lifted to INR4.02 trillion while repurchases were downsized to INR570 billion. 

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