Mumbai/New Delhi: The government on Thursday surprised the bond market by announcing a 32% increase in its borrowing plan for the second half of current fiscal year ending March 2012. This is likely to push up interest rates and crowd out private investments.
The government said it will borrow an additional Rs 52,872 crore from the market in the second half, raising its borrowing programme for the fiscal to Rs 4.7 trillion, the highest ever, and at least 12.5% higher than what was originally envisaged in the budget.
The second half borrowing now stands at Rs 2.2 trillion instead of Rs 1.67 trillion announced earlier.
R. Gopalan, economic affairs secretary, said this will not affect the fiscal deficit projection, pegged at 4.6% of the gross domestic product. The change in the programme was required because of lower government cash balances and a projected drop in small savings for the year, he said.
The government expects a shortfall of Rs 35,000 crore because of fewer collections in small-savings accounts, and dwindling cash reserves, Gopalan said.
The surplus in the beginning of the year was Rs 17,000 crore less than expected, and a dip in the available sources of funds prompted the government to lift market borrowings, he said.
The government targets to increase the tax revenue by 18.5% to Rs 9.32 trillion, even as a slump in stock market has halted its disinvestment plans. It has just managed to raise about 3% of the targeted Rs 40,000 crore from selling stakes in firms controlled by it.
Bond yields rose after the announcement, with the yield on the 10-year bonds rising 10 basis points to 8.44%, as the market was expecting additional borrowing of not more than Rs 20,000 crore. One basis point is one-hundredth of a percentage point.
“This is just the beginning; as the new papers hit the market, the yields will really start moving up, it may go up to 8.7% as well if there is no support from the Reserve Bank,” said Prasanna Patankar, senior vice-president at STCI Primary Dealer Ltd.
The government has already raised Rs 2.5 trillion from the market in the first half of the fiscal year.
The borrowing calendar put up on the Reserve Bank of India (RBI) website showed that government will borrow between Rs 12,000 crore and Rs 15,000 crore every week in papers maturing in 5-20 years and above.
The weekly auction size is high, say bond dealers. According to them, RBI may have to come and buy bonds from the secondary market through the so-called open market operations, or OMO, to infuse liquidity in the system so that banks can have money to buy bonds.
Earlier in the day, C. Rangarajan, chairman of the Prime Minister’s economic advisory council, said he did not expect the government to exceed the borrowing programme, but had warned of difficulty in meeting the fiscal deficit.
“This year, the fiscal deficit is budgeted at 4.6%. It is going to be difficult to achieve this. All the numbers do not gel well. It is important that we maintain a level of fiscal deficit that is consistent with the targets we have set for ourselves,” Rangarajan said at a seminar in New Delhi.
Analysts and bond dealers said there could be another revision in the borrowing target, as the government is unlikely to meet the revenue target since the high interest rates in the economy has put private investment in jeopardy.
“We are expecting another Rs 40-60,000 crore of additional borrowing as a slippage in meeting the fiscal deficit target is yet to be factored in,” said Samiran Chakraborty, head of research, India, for Standard Chartered Bank.
The extra borrowing will spike bond yields and make government’s borrowing cost higher. As yields go up, prices of bonds fall. So investors, mostly banks, holding the bonds in their trading portfolio, will have to book higher losses.
Still banks may want to buy these bonds at high yields and sell them in the market when interest rates fall, which is expected in the first quarter of the next year. Banks’ investment in bonds could be a necessity for them as credit growth in the economy has slowed, with firms going slow in borrowing money.
Most analysts say the interest rate is nearing its peak and rates might start falling next year. In this environment, holding bonds makes economic sense for banks. “The critical assumption here is when the interest rate cycle will turn,” said Chakraborty.
Bloomberg contributed to this story.