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Bond prices rally on government’s front-loaded borrowing calendar

Bond prices rally on government’s front-loaded borrowing calendar
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First Published: Tue, Mar 30 2010. 12 30 AM IST
Updated: Tue, Mar 30 2010. 09 46 AM IST
Mumbai: The Union government on Monday said it would borrow 63% of its Rs4.57 trillion borrowing programme to bridge the fiscal deficit in the first half of 2010-11, according to its borrowing calendar.
Bond prices rallied, with yields on the 10-year paper falling 0.05% to 7.79% following finance secretary Ashok Chawla’s announcement of the borrowing calendar in New Delhi earlier in the morning. At Monday’s close, yield on the 10-year bond had fallen to 7.76%, down from Friday’s 7.85%. Bond prices and yields move in opposite directions.
The Reserve Bank of India (RBI), on behalf of the government, will sell Rs2.87 trillion of bonds in the first half, less than the Rs3-3.10 trillion the market had expected, using issuance sizes of between Rs11,000 crore and Rs15,000 crore every week through September. “The gross number is certainly better in terms of percentage of total borrowing over last year,” A. Prasanna, economist, ICICI Securities Primary Dealership Ltd, told Reuters.
The borrowing calendar, which was released on the RBI website after market hours, showed that securities of tenure of 5-20 years and above will be issued between April and September. At Rs65,000 crore, May will pull in the single largest quantum of funds, while September will be the lowest with Rs22,000 crore.
“There will be some pressure on medium- and long-term bonds. Yields will start moving up from April once supply starts,” Prasanna said.
The front-loaded borrowing calendar, though, will allow firms to access debt market in the second half of the fiscal.
Earlier on Monday, RBI deputy governor Shyamala Gopinath said the borrowings will be in sync with the redemptions in any given week.
The total borrowing for the fiscal year to 31 March 2011, is marginally higher than the current fiscal’s Rs4.51 trillion. On a net basis, after factoring in redemptions of bonds, the borrowing programme stands at Rs3.45 trillion in 2010-11, against Rs3.98 trillion for the current fiscal.
However, according to J. Moses Harding, head of global markets, IndusInd Bank Ltd, the market is looking positive now and “the expectation of the 10-year shooting past 8.5% is not valid now”. He expects yields to be within 7.85-8.15% after a possible 0.50% hike in RBI’s key policy rates during the April policy review. Not everyone shares the enthusiasm.
“Initially there will be some relief because of the lower-than expected first half borrowing, but once the borrowing starts, yields are expected to go up,” said Joydeep Sen, senior vice-president at BNP Paribas Wealth Management.
RBI last year had avenues such as the unwinding of Rs88,000 crore of bonds issued under its liquidity-mopping market stabilization scheme (MSS) and bought around Rs57,000 crore of bonds from the secondary market to infuse liquidity into the markets after a severe global credit crunch.
This year, however, RBI has almost exhausted its MSS bonds and may not be able to actively buy bonds from the secondary market as this will infuse more liquidity into an economy that is facing inflationary pressures. Headline inflation for the month of February rose to 9.89%, prompting RBI to raise key interest rates by 25 basis points. One basis point is one-hundredth of a percentage point.
anup.r@livemint.com
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First Published: Tue, Mar 30 2010. 12 30 AM IST