MUMBAI (Reuters) – The BSE Sensex rose 0.9 percent on Tuesday after a sharp fall the day before, and the rupee also gained as investors harboured hopes for economic reforms in spite of disappointment over Monday’s budget.
However, concerns over a record supply of bonds to fill the growing shortfall between government spending and revenues pushed federal bond yields to three-month highs.
In Monday’s budget, the government forecast a deficit of 6.8 percent of gross domestic product in the 2009/10 fiscal year ending March, its highest in 16 years, and record gross market borrowing of 4.51 trillion rupees ($93 billion).
“We believe the reforms process will possibly move outside of the budget now,” Nomura analysts said in note.
“With overall systemic liquidity remaining high, the market risk-reward profile appears favourable to us.”
After plunging 5.8 percent on Monday, the biggest fall in 6 months, the main 30-share BSE index closed up 0.9 percent, or 127.05 points, at 14,170.45 on Tuesday.
Analysts said although the budget was largely silent on market-friendly measures such as privatisations, it could have been due to the political sensitivities and did not mean that the government had abandoned reforms altogether.
“There is a feeling in the market that the fall yesterday was not entirely justified,” said Apurva Shah, head of research at Prabhudas Liladher.
Morgan Stanley on Tuesday raised its target for the benchmark stock index to 18,000 by next April from an earlier forecast of 15,000, citing higher earnings potential.
Moody’s Investors Service said the budget was consistent with a stable outlook on its sovereign ratings, but said the commitment to cut a debt overhang was weak.
Other agencies expressed concern over deteriorating finances, although imminent changes to ratings were unlikely.
The benchmark 10-year bond yield ended at 7.06 percent, three basis points above Monday’s close.
It hit 7.08 percent in early trade, its highest since March 31, after the government said it would auction 150 billion rupees of bonds on Friday, nearly double the amount it had initially scheduled.
The partially convertible rupee ended at 48.45/46 per dollar on Monday compared with the previous close of 48.57/58, when it had fallen the most in three months.
The rupee hit a two-week low of 48.75 during trade, but recovered on the share market gains and as the dollar reversed gains against major currencies. Continued…
Barclays Capital, in a note, said it expected the rupee to trade in the 48.5-49.5 band in the near term.