The yield on the most-traded 2028 paper rose 5 basis points to 7.595%

Mumbai: The rupee and 10-year gilt prices fell on Friday after finance minister Arun Jaitley hinted that the government was planning a farm relief package ahead of the budget that, analysts expect, may further worsen the fiscal health of the nation.

At 9.12 am the yield on the most-traded 2028 paper rose 5 basis points to 7.595% and the yield on government bonds due in January 2029 gained 2 basis points to 7.303%. Bond yields and prices move in opposite directions.

The rupee weakened to hit a one-month low of 71.19 to a dollar, down 0.22% from its previous close. It opened at 71.08 and touched a low of 71.21 per dollar.

“Without getting into the specifics, because that would be disclosing the mind in which we are working, (I can say that) you cannot opt to wait for some of the challenges. Therefore, obviously, there will be a necessity to address them. It has happened in the past. So we intend to work within the parameters of the conventions as they exist,” Jaitley said at the CNBC-TV18 India Business Leader Awards through video conferencing from New York.

Analysts believe that the government is likely to overshoot its fiscal deficit target for 2018-19, largely owing to a shortfall in goods and services tax collections. Analysts are also concerned about a likely announcement of an income transfer scheme for farmers that could cause the government to miss its pre-announced deficit reduction in 2019-20.

“Any political gain that such a spending shift might bring in an election year is likely to outweigh its negative economic impact. Political uncertainty is a far bigger risk for financial markets at this point”, said Abhishek Gupta, economist at Bloomberg.

The government will present its interim budget on 1 February ahead of national elections in May.

According to recent media reports, the Narendra Modi government is working on measures to provide income support and funding relief to small and marginal farmers, including the possibility of interest-free loans of up to ₹3 lakh.

“Fiscal concerns are overblown. It is true that GST and income tax collections are likely to fall short in fiscal 2019, but higher corporate tax collections, a likely interim dividend from the Reserve Bank of India, and overall spending cuts are likely to bridge that gap,” Gupta added.

Gupta expects the fiscal deficit to be contained at 3.34% of GDP in fiscal 2019, against market concerns of an overshoot to up to 3.5% of GDP.

Also, the continued rise in crude oil prices dampened sentiment. Brent crude has risen in 13 of 17 trading sessions and has gained over 22% during this period.

(Bloomberg contributed to this story)