New Delhi: India will amend rules next week so it can convert market intervention bonds into regular debt and help bridge the fiscal deficit without tapping the market excessively, a senior finance ministry official said.
The converted bonds will be reflected in the government’s books for the year to March.
The move aims to raise Rs45,000 crore ($9 billion) in addition to an already heavy market borrowing schedule, while keeping adequate liquidity in the market.
Officials are working on a mechanism that will transfer a portion of the market stabilisation scheme (MSS) bonds issued in 2007 and early 2008 to soak up excess cash which could have been inflationary.
They were sequestered or isolated in a separate accounting entry, which officials now want to reverse for some of the bonds.
“It (raising Rs45,000 crore) will be done through desequestering of MSS bonds,” Economic Affairs Secretary Ashok Chawla said late last night.
“We have to insert a clause (in the market stabilisation scheme guidelines),” he said, adding that would happen “next week”.
India is exploring ways to check a sudden surge in debt issuance to fund spending and stimulus measures for the remainder of the 2008-09 fiscal year up to end-March and into the following year.
Analysts said the flood of supplies has pushed bond yields higher, partially neutralising the effects of a combined 350 basis point cut by the central bank to its key lending rate by since October.
“The market was reacting to the 2009-10 borrowing number. The 10-year bond yield coming below 6 percent will be pretty difficult,” said A. Prasanna of ICICI Securities. The benchmark bond yield was at 6.31% at 0720 GMT Thursday.
On Monday, the finance ministry in its interim budget for 2008/09 revised its gross market borrowing target to Rs3.06 trillion, above the planned Rs2.61 trillion. It set a target of Rs3.62 trilion for next year.
A surge in bond supplies has prompted the central bank to buy back MSS and other bonds through open market operations.
“The Reserve Bank of India, through open market operations, is trying to prevent yields from spiking up. I am not ruling out rate cuts but it may not happen immediately,” Prasanna added.
India’s economy is expected to expand 7.1% in 2008-09, sharply slower than 9 % of last year, as the global slump trims demand and delays corporate expansion.