New Delhi: India said it will sell 2.4 trillion ($47.4 billion) of bonds in the first half of 2009/10, two-thirds of its full-year target, raising fears in an already nervous market that funding needs may be bigger than expected.
After market hours, the Reserve Bank of India said it would buy back Rs80,000 crore of bonds at auctions in the six months from April, the start of the fiscal year, equal to one-third of the government’s planned gross issuance.
It represents a stepping up of recent efforts to manage the impact of the heavy borrowing and contain rising yields, which had undermined the effectiveness of its interest rate cuts.
The front-loading of the record Rs3.6 trillion of gross borrowing pencilled in for the fiscal year starting 1 April and a decision ruling out a direct placement of bonds with central bank had earlier sent 10-year yields surging above 7%.
“This has put a risk of an upward revision in the borrowing target for the year as a whole,” said Deepali Bhargava, economist as ING Vysya Bank. “This may be detrimental for the already mounting fiscal concerns.”
RBI governor Duvvuri Subbarao also warned India’s economic slowdown has been steeper than previously estimated but further fiscal stimulus to boost activity would carry a cost.
The 10-year bond yield spiked to two-week high of 7.18% after the announcement of the borrowing plan, and closed at 7.02%, up 25 basis points on the day. The market is shut on Friday for a holiday.
The Indian government’s finances have deteriorated sharply in 2008/09 after making solid gains in recent years, owing to a slowing economy, stimulus measures, large subsidies, increases in salaries of civil servants and a loan waiver for small farmers.
India heads to national polls in April-May and a new government is expected in office by June. Election promises could further increase government spending and widen the deficit.
After falling more than 250 basis points last year, the 10-year yield is up 177 basis points this year as a late rush of government borrowing in 2008/09 - Rs91,0000 crore since February - and record coming supplies have unsettled investors.
That surge of debt has blunted the central bank’s aggressive burst of monetary easing since October, including rate cuts of 150 basis points in 2009, as banks have been reluctant to cut their lending rates.
RBI Governor Subbarao said banks needed to pass on rate cuts for policy to be effective. He said the central bank would manage the government borrowing programme so it caused as little market disruption as possible, but cautioned it would be a challenge.
“I am sensitive to the fact that when credit demand picks up, private credit demand picks up, this is going to be more challenging but we will manage,” he said.
Since 19 February, the central bank has held auctions to buy back bonds from the market, scheduling them ahead of auctions selling government debt.
The central bank has bought Rs46,600 crore of bonds at auction, while in the same period the government has sold Rs46,000 crore of bonds, including 120 billion on Thursday.
Some analysts said the government’s funding needs could further push up yields and make it harder for companies to raise funds, but economic affairs secretary Ashok Chawla said that would not be the case.
“The calendar has taken into account the requirement of the market and will not in any manner crowd out the requirement of the corporate sector,” he told reporters.
The federal fiscal deficit in 2009/10 is projected at 5.5% of gross domestic product, below the estimate of 6% for 2008/09, though analysts expect that to be revised up as the government has said the economy may need more stimulus.
Analysts say the consolidated deficit, including state deficits and off-budget items such as subsidy costs, could already be around 10%.
Last month, ratings agency Standard & Poor’s cut its outlook on the country’s long-tem sovereign credit rating to negative from stable, citing worsening government finances.