A Rs 1.45 trillion tax cut may undermine rate reductions

A Rs 1.45 trillion tax cut may undermine rate reductions in India

India’s $20 billion tax-cut boosts may have an unintended effect of keeping borrowing costs high. The premium of 10-year yields over the central bank’s policy rate widened to the most since April after the surprise stimulus announced Friday raised fears the government will miss its budget deficit targets. Traders say the spread offers lenders little incentive to pass on past interest rate cuts to customers.

The central bank has cut rates four times this year, banks have been reluctant to fully pass on Asia’s most aggressive easing amid a surge in bad loans. The widening spread reflects worries about the government adding to its record borrowing after the major booster.

Finance Minister Nirmala Sitharaman said there were no plans to revise its borrowings of Rs 7.1 trillion for now, traders remain cautious. Standard Chartered forecasting the need for as much as Rs 800 billion ($11.3 billion) of new debt.

The tax cut, estimated to cost Rs 1.45 trillion in lost revenue, may push up the fiscal deficit to 3.9% of gross domestic product for the year to March, compared with a goal of 3.3%, according to a Bloomberg poll of economists.

The yields on 10-year bonds surged as much as 24 basis points on Friday, the most since February 2017, and a gauge of volatility for the notes rose to an eight-month high. They fell 4 basis points on Monday to 6.75%.

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