You can fool all of the people, but not the bond market.

The government is to borrow less in the first half of the next financial year in response to falling prices of its bonds. Fall in prices means the government has to pay higher interest to get dealers to buy its bonds, which means higher yields. The government is to offer more short term bonds and floating rate bonds, or FRBs, where interest is set every six months and hence have lower risks. The government will raise Rs 2.88 trillion, or 48% of borrowing, in the first six months and will reduce its total borrowing by Rs 500 billion. Normally it borrows 60% in the first half of the financial year and was planning to borrow a total of Rs 6.05 trillion. Bond yields fell by 25 basis points and the rupee strengthened against the dollar on the news. Problem is that banks are refusing to help the government by buying its bonds. Banks are required to hold a portion of their total deposits in government securities, known as the Statutory Liquidity Ratio, or SLR. The present rate for SLR fixed by the Reserve Bank is 19.5% but most banks are holding in excess of 30%, wrote T Bandopadhyay. That is because banks are unwilling to lend to industry until their bad loan problems are solved so they have invested in government securities which are totally safe and provide them with some interest income. However, banks are required to value their holdings at market price, known as mark to market, and not the buying price so when the prices of bonds fall they have to show that as a loss, which adds to their non-performing assets bill. Besides, the quantity of bonds has risen because state governments have increased their borrowing from Rs 2.59 trillion in 2016 to Rs 3.43 trillion in 2017 to Rs 3.58 trillion in 2018. Which means that the banks are unable to absorb an increase in central government borrowing. So a decrease in total government borrowing and a slower pace is good news. The Reserve Bank may increase the limit for foreign investors, to bring new money to the market. Equity and bond markets have been diverging for sometime. Whereas equities are looking at corporate profits bond dealers are factoring in global risks to the Indian economy and the possibility of inflation. "The higher fiscal deficit and rising global commodity prices may stoke the fires of inflation, prompting the central bank to raise rates in coming months, bond markets fear," wrote T Kundu, warning the government of annoying the "bond vigilantes". The Prime Minister is spending more on subsidies with an eye on elections next year. Taxes have been increased stealthily in the form of cess and this money has been used for revenue expenditure. The people maybe fooled but not the bond market. It is showing its displeasure.