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Thank You, Mr Finance Minister

Could bond markets have asked for more from Mr Jaswant Singh? Not really. Small-savings rate cut followed by a repo rate and then a bank savings account rate cut. Does this mean that the bull run in bonds will continue?

Mr Jaswant Singh's maiden Budget on Friday pleased the bond market a great deal. The Budget cut the small-savings rate by 1 per cent against the market's expectation of a 0.50 per cent reduction. The yield on the 10-year benchmark paper dropped from 6.45 per cent to 6.26 per cent. However, a ballooning fiscal deficit saw dejection replace euphoria in the market. As a result, the 10-year benchmark inched up to 6.35 per cent during the day.

Toeing the finance minister's line, the apex bank too cut the repo rate and bank savings account rate by 50 basis points (bps) each, confirming the softer interest rate bias. This took the bond market--which had been volatile since end-January—completely by a surprise. The bulls came out in full strength as the yield curve moved down by 25-35 basis points. In rupee terms, the price appreciation ranged between Rs 2 and Rs 6.

However, the week hadn't started on such a rosy note. The Rs 7,325-crore state auction and high inflation had kept the buyers at the fences and in the initial trading sessions gilt prices moved in a narrow range. While there were expectations of a cut in small-savings rate, the Economic Survey's revelation that the fiscal deficit for current financial year might go up to 5.5 per cent as against the targeted 5.3 per cent, threw a spanner. In fact, the target for the next financial year has been revised to 5.6 per cent of the GDP. Global rating agencies, Standard & Poor's and Moody's, hold the opinion that the government has done little to correct its fiscal imprudence and it remains to be seen that whether the estimated targets are achievable or not.

The key measures that the Budget 2003-04 announced were: reduction in the excise and the custom duties on most consumer items; removal of 5 per cent surcharge on personal income; hike in standard deduction; special pension scheme for senior citizens, removal of the long-term capital gains on shares; and hike in interest exemption limit under Section 80L. Besides, the dividend from debt funds and companies has been once again made tax-free in the hands of investors, though the dividend distribution tax has been brought back. This along with a reduction in interest rates across various investment avenues such as RBI Relief Bonds and bank savings account enhances the appeal of mutual funds. All this saw bond funds manage a recovery.

On the macro front, the Budget has increased the outlay for infrastructure; laid out a debt swap plan for improving states' financial health and a plan for repaying India's foreign debt. There has been a marginal rise in government's gross borrowing programme from current year's Rs 1.59 lakh crore (revised estimate) to Rs 1.65 lakh crore for the year 2003-04. After all, a lower borrowing programme lifts the pressure from the bond market too.

Outlook
Indeed, the million-dollar question now is will bond markets continue to rally? With government privately placing gilts with the RBI, this will allow the apex bank to offload these securities in the market via an OMO, and, hence put brakes on falling yields. The financial-year end pressures may creep in March. Moreover, war clouds are yet to disappear completely. A prolonged war in the Gulf region may disrupt Budget estimates and prevent a recovery. So, rather than events guide your investments, let your financial goals guide them.