New Delhi / Mumbai: The Reserve Bank of India on Thursday said the Union government would borrow Rs2.41 trillion by sale of bonds in the first half of fiscal 2009-10—nearly the amount it borrowed in all of fiscal 2008-09. That would make up most of its planned borrowing of Rs3.6 trillion.
Simultaneously, RBI also announced a bond buying calendar indicating it would purchase Rs80,000 crore from the market in the same period, bringing down the net borrowing to Rs1.61 trillion.
RBI said in a release it will also create liquidity by unwinding intervention bonds worth Rs42,000 crore in the first half of the year. These bonds were floated by RBI under the so-called market stabilization scheme (MSS) to mop up excess liquidity from the system in past years.
In a parallel development, RBI set a limit of Rs20,000 crore on outstanding loans to the Union government during the first half of fiscal 2009-10.
The limit under the so-called Ways and Means Advances facility will be Rs10,000 crore during the second half of the fiscal year, RBI said.
RBI will charge the government the repurchase rate for loans extended to the maximum limit. The repurchase rate, currently 5%, is the rate at which RBI lends to banks. Loans beyond the limit are charged an additional 2%.
The government is not allowed to keep an overdraft for more than 10 days. If loans exceed 75% of the limit, it must sell bonds to repay the funds, RBI said.
Earlier on Thursday, bond yields jumped in anticipation of a supply surge.
Market interest rates have risen sharply this year in response to the government’s high borrowing needs, heading up even as RBI has been cutting its policy rates and so raising pressure on the central bank to intervene.
The yield on the 6.05% note due February 2019 rose 25 basis points to 7.02%, at close in Mumbai, according to the central bank’s trading system. That is the highest since the bond was issued on 2 February. The price declined Rs1.66 per 100-rupee face amount, to 93.19., up sharply from 6.77% on Wednesday.
That took the increase in the yield this year close to 200 basis points even as the central bank slashed its lending rate by a total of 150 basis points to 5% to shield the economy from the global financial crisis.
Yields have risen despite a plunge in inflation, which fell to a record low of 0.27% in the week through 14 March.
Complicating the outlook for government borrowing are national polls. A new government is expected to take office by June and could change the borrowing plans.
With bond market yields undermining monetary policy, some analysts think RBIcould soon start monetizing the deficit.
Reuters and Bloomberg contributed to this story.