New Delhi: The government said it will sell Rs2.4 trillion ($47.4 billion) of bonds in the first half of 2009-10, two-thirds of its full-year target, raising fears in an already nervous market that funding needs may be bigger than expected.
The front-loading of the record Rs3.6 trillion of gross borrowing pencilled in for the fiscal year starting April 1 and a decision ruling out direct bond buying by the central bank sent 10-year yields surging above 7%.
“This has put a risk of an upward revision in the borrowing target for the year as a whole,” said Deepali Bhargava, economist as ING Vysya Bank.
“This may be detrimental for the already mounting fiscal concerns.”
The government’s finances have deteriorated sharply in 2008-09, after making solid gains in recent years, owing to a slowing economy, large subsidies, increase in salaries of civil servants and waiver or loans given to small farmers.
The 10-year bond yield spiked to two-week high of 7.18% after the announcement of the borrowing plan, and was holding above 7% in afternoon trade.
The yield, which closed at 6.77% on Wednesday, has risen about 50 basis points this week alone. Government bonds yields globally are under upward pressure as governments line up borrowing to pay for stimulus plans.
Gross borrowing for the current fiscal year of 2008-09 is estimated at Rs3.06 trillion, with Rs91,000 crore of that announced since February.
India heads to national polls in April-May and a new government is expected in office by June. Election promises could further increase government spending and widen the deficit.
The heavy borrowing needs have seen market interest rates rise sharply in 2009, underming the effectiveness of cuts in policy rates by the Reserve Bank of India.
Some analysts said the government’s funding needs could further push up yields and make it harder for companies to raise funds, but economic affairs secretary Ashok Chawla said that would not be the case.
“The calendar has taken into account the requirement of the market and will not in any manner crowd out the requirement of the corporate sector,” he told reporters.
Adding to market nervousness, Chawla said there was no need for a private placement on bonds with the central bank, although he said it would continue its open market operations as required.
Investors had hoped the plan would include details of steps by the Reserve Bank of India, the central bank, to manage the market impact of the borrowing.
“Now the real concern for the bond market is the uncertainty about how the RBI will facilitate the huge-sized borrowing and this is getting reflected in the market yields,” said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.
“The major concern is in what phases this will happen and how much open market operations will be conducted.
Since 19 February, the central bank has held auctions to buy back bonds from the market, scheduling them ahead of auctions selling government debt.
Chawla said a new auction calendar would be announced on Monday.
The central bank has bought Rs46,600 crore of bonds at auction, while in the same period the government has sold Rs34,000 crore of bonds. A further Rs12,000 crore in bonds are scheduled for sale later on Thursday.
The fiscal deficit in 2009-10 is projected at 5.5% of gross domestic product, below the estimate of 6% for 2008-09, though analysts expect that to be revised up as the government has said the economy may need more stimulus.
Analysts say the consolidated deficit, including state deficits and off-budget items such as subsidy costs, could already be around 10%.
Last month, ratings agency Standard & Poor’s cut its outlook on the country’s long-tem sovereign credit rating to negative from stable, citing worsening government finances.
Inflation Near Zero
Separate data released earlier showed wholesale price inflation rose 0.27% in the 12 months to 14 March, below the previous week’s annual rise of 0.44% and the lowest annual reading on record for the current series.
But it had little market impact, with bond traders more focused on the borrowing plan, and analysts pointing out that consumer price inflation remained high.
”Inflation will soon be below zero percent, but the consumer price index is still in double digits and we are not seeing a situation of demand contraction,” Bank of Baroda’s Nitsure said.