New Delhi: The government will sell 63% of its bond issuance for the new fiscal year in the first half, slightly less than expected, giving a near-term respite to satiated bondholders and helping send yields slightly lower.
The government will sell Rs2.87 trillion ($64 billion) of bonds in the first half of fiscal year 2010-11, which starts on 1 April.
The borrowing calendar is closely watched by a bond market girding itself for record issuance in the new fiscal year. The first half figure was just below forecasts for issuance of about Rs3. 1 trillion in the April-September period.
“There would be a short-term rally in bonds after which I expect yields to perk back up,” said Abheek Barua, chief economist at HDFC Bank in New Delhi.
“The second-half borrowing will be aggressive and that is when liquidity typically tightens,” he said.
The front-loaded borrowing, consistent with government’s practice in recent years, is intended to allow space for private borrowing in the second half of the year when the economy is expected to gather more steam.
The yield on the benchmark 10-year government bond fell 1 basis point to 7.83% after the news, declining further to 7.78% by 4:51 pm.
“The first auction will go smoothly because of demand from banks at the beginning of the year. But I expect yields to move above 8% after the first few auctions,” Ananth Narayan G, the Mumbai-based South Asia head of rates and credit at Standard Chartered Bank, said.
The Reserve Bank of India (RBI) was expected later on Monday to provide details on the size and the maturity of the bonds to be auctioned. Traders are looking for a higher portion of three to five year maturities, which could push up short-term rates and flatten the yield curve.
“We expect that based on the inflows and outflows and the trends in the economy and the fact that corporates and institutions will have better access to external commercial borrowings etc, we have kept the first half borrowings at Rs2.87 trillion,” finance secretary Ashok Chawla told reporters.
A finance ministry official, dealing directly with government borrowing and who did not wish to be named, said the issuances would be a mix of instruments with maturities of 5-9 years, long-term bonds with tenors 15 years and above, and floating rate bonds.
The bulk of the weekly tranches would be of lots of Rs120-130 billion, he told reporters.
“If redemptions are more in a particular week or month, we will borrow slightly more (in that period),” Shyamala Gopinath, a deputy governor at the RBI, told reporters after officials of the central bank and the finance ministry met to finalize the first half borrowing schedule.
The government’s gross borrowing in 2010-11 is set to rise an annual 1.3% to Rs4.57 trillion to fund a fiscal deficit that is projected at 5.5% of the gross domestic product (GDP).
The RBI has said managing the government’s debt programme this year would be a challenge as last fiscal year’s net debt supply was significantly lower than the net borrowing on account of a $13.6 billion buy-back of bonds by the central bank.
This year the RBI may not buy back as many bonds as it did last year as it would not like to increase liquidity when inflationary pressures are mounting.
The RBI is also constrained by the fact that it has nearly exhausted its stock of Market Stabilization Scheme bonds which are used to absorb liquidity from the markets.
Headline inflation was near 10% in February, prompting the RBI to unexpectedly raise its key lending and borrowing rates by 25 basis points each on 19 March.
The central bank has said it is imperative to anchor inflationary expectations and analysts have forecast another rate hike during the policy review on 20 April.