Mumbai: Bond prices rose and yields dropped on Thursday after the Indian central bank announced that the government will borrow Rs1.1 trillion between now and September.
This is in addition to Rs12,000 crore, to be raised on Friday.
The borrowing plan translates into a weekly borrowing of roughly Rs11,000 crore. The market was expecting the government to borrow Rs15,000 crore every week.
The government has so far raised Rs1.77 trillion from the market this fiscal up to 10 July.
Reserve Bank of India (RBI) deputy governor Shyamala Gopinath, who met finance ministry officials in Delhi on Thursday to finalize the borrowing calendar, comforted the market saying RBI will buy back up to Rs39,000 crore of bonds from the secondary market to ensure that borrowings are conducted in a non-disruptive manner.
RBI has already bought back about Rs29,850 crore of bonds from the secondary market this fiscal. It had earlier said that it would buy back up to Rs80,000 crore worth of bonds from the market.
The yield on 10-year bonds dropped 0.07% after the announcement and closed at 6.7931%. Prices and yields on bonds move in opposite directions.
The latest announcement takes the borrowing in the first half of fiscal 2010 to Rs2.99 trillion against the interim-budget estimate of Rs2.41 trillion.
In his Budget statement, finance minister Pranab Mukherjee increased the yearly borrowing target to Rs4.51 trillion from Rs3.62 trillion estimated earlier.
The government will finish the majority of its yearly borrowing plan in the first half itself and leave space for corporations to borrow in the second half. This could also ensure that government gets money cheap as interest rates are expected to harden after September.
The government will initially issue about Rs12,000 crore of bonds a week, S.K. Das, a joint secretary in the finance ministry, told reporters in New Delhi.
“The market was positively surprised by the announcement,” said Debendra Kumar Dash, a fixed income dealer with Development Credit Bank Ltd.
The yields also dropped following the Rs39,000 crore buyback plan announced by the RBI deputy governor.
Although some dealers see the fall in yields as a temporary phenomenon, Harihar Krishnamurthy, head of treasury at First Rand Bank, said yields may not shoot up from the present level.
The liquidity in the system would appear to be more than enough to take care of any extra borrowing, with banks parking over Rs1.2 trillion of their excess liquidity with the central bank every day.
According to Dash of DCB, the 10-year yield should move in the band of 6.52-7%.
Cherian Thomas and Bibhudatta Pradhan of Bloomberg contributed to this story.