New Delhi: India will borrow an extra Rs46,000 crore by late March from the market, an official said on Tuesday, sending bond yields higher and raising concerns about the state of public finances.
The extra borrowings are largely aimed at supporting the economy, which is expected to expand at its slowest pace in six years in 2008-09 as the global economic crisis takes a toll.
“We had discussions with the Reserve Bank of India (RBI). The borrowing will be between 20 February and 20 March to the order of Rs46,000 crore,” economic affairs secretary Ashok Chawla said.
He said the extra borrowing would be done in four tranches. India’s fiscal year ends on 31 March.
The government’s finances have deteriorated in 2008-09 due to increase in salaries of government employees, large subsidies on oil and fertilisers and waivers on loans for small farmers, prompting the government to borrow more from the market.
A slowing economy has meant that the government receipts have remained sluggish while it had to forego a substantial amount in duty which were aimed at boosting demand. The central bank said it would conduct the market borrowings in a non-disruptive manner. The 8.24 % federal bond yield jumped 17 basis points after the government’s announcement, before trimming the rise.
“Yields will move up now, but eventually come down along with the gradual completion of this fiscal year’s borrowing programme,” said Gopal Tripathi, a fixed income dealer at HDFC.
Anoop Varma, an associate vice president with Development Credit Bank said everyone would now want to sell on upticks unless there was a rate cut.
The Indian government will roll out a temporary budget on 16 February but its deteriorating public finances have already posed a concern for rating agencies. Fitch Ratings affirmed India’s ratings on Monday but kept its negative outlook on the local currency rating, saying public finances will deteriorate due to a weakening economy and government stimulus measures.
Fitch forecast India’s general government deficit will reach 9.5 % of gross domestic product (GDP) in 2008-09, up from 6.1 % in the previous year. The agency includes oil and fertiliser bonds in its estimates.
The government will now end up borrowing Rs1.16 trillion more than its budgeted estimate of Rs1.45 trillion.
This is the highest government borrowing programme ever. In fiscal 2008, the government had borrowed Rs1.82 trillion from the market.
Economists Indranil Pan and Kaushik Das of Kotak Mahindra Bank Ltd, in a research note on Tuesday, said the additional borrowing “indicates large pressures on fiscal deficit for 2008-09”.
They have estimated the centre’s fiscal deficit for the year ending March to be around Rs3.27 trillion, or 6% of the GDP, against the budgeted estimate of Rs1.33 trillion, or 2.5% of GDP.
This does not include expenditure on off-balance sheet items such as food, oil and fertilizer bonds.
“There are enough indications given by the Planning Commission chief and RBI governor that there would be rate cuts sooner than later. We may see 50 basis points cut in both policy rates in next two to three weeks,” said Agam Gupta, head of treasury at Standard Chartered Bank.
One basis point is one-hundredth of a percentage point.
Neha D’Silva and Swati Bhat in Mumbai and Anup Roy of Mint contributed to this story.