Mumbai: India’s government is seen borrowing a record Rs2.25 trillion between April and September and the central bank may have to intervene aggressively to ensure investor demand remains intact, bond traders say.
The borrowing plan, the median of estimates by eight banks, is more than double that of the first half of 2008/09 and accounts for nearly 60% of the total budgeted gross borrowing of Rs3.62 trillion.
“We do believe that there is going to be more of front loading in the first half,” said Vineet Malik, head of interest rates at HSBC India, adding that the central bank will provide some room for overshooting the target in the second half of FY10.
Supply concerns have plagued bond markets in recent weeks after the government announced a fresh plan to raise Rs910 billion in early February, sending bond yields to four-month highs almost negating the effect of the central bank’s rate cuts.
Benchmark yields are already up more than 200 basis points so far this year even as the central bank cut rates by 150 basis points and traders say it would have to ramp up its buyback operations to prevent a selloff in the markets.
“If there is some buyback schedule or roadmap then the borrowing plan will go smoothly otherwise yields will tend to rise because the borrowing amount is large by itself,” said Arvind Sampath, head of rates trading at Standard Chartered Bank.
Analysts say the central bank could follow the steps of its global peers such as Bank of Japan which said it would increase its government bond buying by nearly a third this year and the Bank of England which said it would buy federal debt.
ICICI Securities estimates that the total demand for debt would only meet 61 percent of the supply and the demand-supply gap would amount to Rs1.0-1.5 trillion and unless the central bank steps in, the borrowing plan won’t take off.
The Reserve Bank of India (RBI) can’t directly buy debt from the government as private placements are banned by a 2003 law, barring exceptional circumstances and analysts say RBI will have to start considering this option after the federal elections end in May.
“The central bank should come up with a private placement but if it is not possible, then ideally, I would expect them to make a schedule of open market operations, like the borrowing plan, which will probably provide a breather to the market” said Ashish Vaidya, head of interest rates trading at HDFC Bank.
The tenure may be focussed between the 10-15 year range as the papers are more liquid than longer-tenor debt, analysts say.