Mumbai: The bond yields rose sharply on Monday as investors pared positions ahead of a meeting of government and Reserve Bank of India officials, expected on Tuesday, to finalize a schedule for extra borrowing.
Economic affairs secretary Ashok Chawla said a cash and debt management group would meet to work out the funds needed for the remainder of the current 2008-09 fiscal year ending in March.
The yield on the most traded 8.24% 2018 federal bond ended at 6.33%, after hitting a fresh one-week low of 6.13% in early trade. On Friday, it closed at 6.19%.
The yield on the 2018 bond hit an eight-week high of 6.53% last week. It had touched an all-time low of 4.86% in January, after the apex bank cut rates aggressively.
The RBI has already borrowed Rs620 billion above the budget estimate and will auction bonds for Rs80 billion more on Friday, completing the extra borrowing announced so far.
It will also issue treasury bills worth Rs80 billion on Wednesday.
Tuesday’s meeting will decide how much more the government would borrow after this week’s auction is out of way.
“There was a need to borrow more due to higher expenditure and lower revenue receipt,” said Chawla, a senior official in the finance ministry.
Suresh Tendulkar, the chairman of Prime Minister’s Economic Advisory Council, said the fiscal deficit situation was not comfortable and that it was the right time to end state subsidies on fuel prices.
The federal government’s finances have deteriorated sharply in 2008/09, in part due to higher salaries for civil servants and a massive write off of loans held by small farmers.
The fiscal packages announced in the wake of the global financial crisis to keep the economy from slowing too sharply have also increased the gap between revenue and spending.
The RBI estimates the federal government fiscal deficit for 2008-09 at 5.9%, way above the budget estimate of 2.5%.
Data released on Monday showed the economy is estimated to have expanded by 7.1% in 2008-09, its slowest pace in six years, compared with the previous year’s 9.0% growth.