Mumbai: Bond yields rose on Thursday as the market expected inflation to accelerate, and dealers said the yields could go up further as the government is likely to overshoot its borrowing target this fiscal year.
Despite government’s assurance that it will not overshoot its borrowing target of Rs1.45 trillion for fiscal 2009, traders and economists said it might have to go for extra borrowings to bridge the fiscal deficit on account of populist measures. If the government borrows further from the market, it will increase the supply of bonds, hurting prices. Yields rise when bond prices fall.
The government has so far borrowed Rs82,000 crore of the Rs96,000 crore target for the first half of the fiscal year that began in April. The borrowing calendar for the second half is expected to be announced in end-September.
The Reserve Bank of India building in New Delhi. The government had estimated fiscal deficit at Rs1.33 trillion for 2009. Bond dealers say this could increase due to its populist measures. Photograph: Harikrishna Katragadda / Mint
Bond traders said there could be an overshoot of at least 10% in long-term dated instruments and this would push the yields further up from current levels. On Thursday, the yield on the benchmark 10-year government bond rose to 9.21% from the previous close of 9.14%.
Later in the day, the government said inflation accelerated to 12.63% in the week ended 9 August. The rate was 12.44% the previous week.
The government had estimated fiscal deficit at 2.5% of gross domestic product (GDP), or Rs1.33 trillion, for fiscal 2009. But this would increase by about Rs95,000 crore on account of duty cuts on edible oils, subsidy to oil marketing companies, and an additional expenditure of Rs15,700 crore due to higher salaries for government employees, said Shubhada Rao, chief economist at Yes Bank Ltd.
“If we take into account the balance sheet items, the fiscal deficit might widen to 4.2% of gross domestic products. But if we consider other off-budgeted items such as oil and fertiliser bonds, the deficit might go up to 6.7% to 7%,” says Rao.
“Although some pressure on the balance sheet can be eliminated by the windfall revenue gain through disinvestment and 3G licence allocation, that won’t be enough. Hence, the government might have to borrow from the market.”
The government plans to raise about Rs40,000 crore through auction of airwaves to phone firms to roll out so-called 3G or third-generation services.
A recent JPMorgan Chase and Co. research note by analyst Vikas Agarwal says the budget estimate may exceed by as much as Rs80,000 crore.
“The Central government had commenced this fiscal year with a Rs30,000 crore cash surplus, which can be utilized to pay for the extra spending. In addition, there are around Rs25,000 crore of sterilization bills maturing during the remaining months... These can be substituted to regular bills, which are part of the government’s borrowing,” the note, titled “India: A bleak fiscal outlook”, says. “Still, an additional borrowing of around Rs25,000-30,000 crore will have to be conducted, most likely through bonds.”
If the additional bond issuances are done in this “current unfavourable monetary backdrop”, yields might end the year with double digits on the 10-year bond, he says.
A. Prasanna, vice-president of ICICI Securities Primary Dealership Ltd, which buys and sells government securities, says the government might have to borrow from the market. “I think there will be a need for an extra Rs20,000 crore to Rs40,000 crore borrowing through long-term dated papers.”
According to S.S. Raghavan, head of treasury of IDBI Gilts Ltd, another primary dealer, there is a possibility that the borrowing programme could be overshot by 10%. “Although the 3G licence is quite certain, and the Left’s exit from the coalition government has made it easier to push for disinvestments of the government stake in public sector undertakings, it remains to be seen whether the government will be willing to disinvest in this current market scenario.”
Indian stocks have lost almost a third of their value after peaking in January this year.
However, Rao of Yes Bank said the government may go for treasury bills instead of locking itself in long-term liabilities by floating dated papers. According to Rao, if the government gets a good amount through disinvestment of its stake in state-run firms and through the 3G auction, the fiscal deficit can come down to 3% of GDP.
The government may also go for small savings schemes such as as public provident fund, provident fund and the Reserve Bank of India relief bond to bridge the gap, he said.
If the government goes for additional borrowing from the market, bond dealers are certain that it will affect the market sentiment and bond yields across maturities will rise.