The government a fiscal stimulus package of USD 20 billion as a Diwali gift to the economy in addition to an incentive scheme worth around USD 800 million to revive the covid hit economic growth. The fiscal package comes in the wake of severe stress on government finances as seen by the shortfall in revenues.
Salient features of announced package
· New scheme to incentivize job creation.
· Extending a credit guarantee scheme.
· Covering more sectors under the manufacturing performance-linked incentive scheme.
· Additional spending on PM Awaas Yojana (Urban).
· Support for construction and infrastructure contractors.
· Income tax relief for developers and home buyers.
· Further equity infusion in the National Investment and Infrastructure Fund.
· Higher fertilizer subsidy for farmers
· Additional outlay for the PM Garib Kalyan Yojana
· Credit boost for exports
· Additional stimulus towards capital and industrial expenditure
· A grant for Covid vaccine development
The fresh fiscal stimulus will have to funded by higher borrowing, increasing the supply of bonds in the market.
CPI inflation for October 2020 was over 7% and well above RBIs target of 4%. The economic slump due to covid has not reduced prices in the economy and as the government spends more on stimulus and not on infrastructure building for capacities, prices can stay high.
10-year government bond yield is trading at around 5.90% to 6% levels, largely being held down by the RBI, which is supporting the yield through bond purchases. However, this cannot go on indefinitely with more borrowing by government and higher inflation. Bond yields will tend rise going forward unless there are clear signs of inflation coming off and bond supply easing.
Domestic industrial production increased by 0.2% in Sep’20. During the month, the electricity generation rose by 4.9%, the mining sector output expanded by 1.4% while the manufacturing sector contracted 0.6%.
India’s retail inflation rose to 7.61% in October 2020 from 7.27%(revised) in previous month. The rise in retail inflation in October was driven by rising food prices. The Consumer Food Price Index (CFPI) or the inflation in the food basket climbed to 11.07% in the month of October, up from 10.68% in September
During Apr-Sep FY21 India’s fiscal deficit rose to Rs 9.14trillion which is 114.8% of the annual budget estimate. During the mentioned period, total receipt collected by Government amounted to Rs 5.65 trillion which is 25.18% of budgeted estimate as compared to 40.2% in last year.
Government bonds, SDL and OIS yield movements.
During the week, the 5.77% 2030 yield increased by 1 bps to 5.88%, while 5.79% 2030 bond yield rose by 3 bps to 5.90%. 6.45% 2029 bond yield remained unchanged at 5.96%. 5-year benchmark bond, 5.22% 2025, yield decreased by 3 bps to 5.11%. 6.19% 2034 yield level rose by 1 bps to 6.22%. In the same line, long term paper 7.16% 2050 yield increased by 1 bps to 6.68%.
The spread of 10-year bond over 5-year bond (5.22% 2025) rose to 79 bps as compared to 73 bps previous week. The 15-year benchmark over 10-year benchmark spread increased to 35 bps from 32 bps. 30-year benchmark over 10-year benchmark spread declined to 70 bps from 82 bps.
In the SDL auction conducted last week, average 10-year SDL yield remained stable at 6.56% as compared to 6.46% in previous week. Consequently, spread with G-sec benchmark rose to 65 bps from 56 bps.
On weekly basis, 1-year OIS yield rose by 2 bps to 3.61% while 5-year OIS yield increased by 1 bps to 4.37%.