Mumbai: The government will borrow an additional Rs 40,000 crore ($7.53 billion) through bonds in the fiscal year that ends in March, the RBI said, roughly in line with market expectations and ending weeks of speculation.
However, the RBI also announced a larger-than-expected government borrowing plan through short-dated paper for the January-March quarter, and traders said bond yields could rise a further 8-10 basis points on Monday.
“The increased borrowing through dated securities was more or less expected. But that number coupled with the net increase in T-bill borrowing is a lot more than the market was expecting,” said Nirav Dalal, president and managing director, debt capital markets at Yes Bank in Mumbai.
“I don’t think the bond market is going to like it.”
The country’s fiscal position has been deteriorating as economic growth slows. Anticipation that New Delhi would borrow additional funds has been weighing on Indian markets.
The yield on the benchmark 10-year federal bond hit a three-week high on Friday as the market braced for more borrowing.
It ended at 8.56% after touching 8.60%, its highest since 7 December and 2 basis points higher than Thursday’s close, before the new borrowing calendar was announced.
Earlier on Friday, the government said its fiscal deficit for the first eight months of the financial year ballooned to nearly 86% of its full-year target.
The government is widely been expected to miss its fiscal deficit target of 4.6% of GDP for the fiscal year that ends in March by a full percentage point or more.
Open Market Operations?
The new T-bill schedule brings the fiscal year’s net borrowing through those securities to Rs 65,000 crore, from the Rs 15,000 crore budgeted, according to Yes Bank’s Dalal.
This would need to be refinanced through borrowing or other sources in the next fiscal year, he said.
“This does not bode well for next year’s fiscal deficit,” he said.
The additional supply will add further strain on tight money market liquidity, and is likely to spur the RBI to continue to buy back bonds through open market operations (OMO), traders said.
The Reserve Bank of India has bought Rs 41,210 crore in bonds through open market operations since late November.
It may buy back a further Rs 60,000-80,000 crore in bonds through open market operations in the remainder of the fiscal year, said Ashutosh Khajuria, president of treasury at Federal Bank.
Mohan Shenoi, head of treasury at Kotak Mahindra Bank in Mumbai, said he expected the benchmark bond yield to open at 8.65% on Monday.
“It may be difficult to absorb this kind of additional borrowing unless there is OMO,” he said.
“Yields should settle down in the 8.65-8.70% range if OMO is there, but if OMO is not there or the market gets disappointed on the extent of OMO then it can go even up to 8.85 or so,” he said.
In late September, New Delhi increased its borrowing plan for the second-half of 2011-12 to Rs 2.2 trillion, from the budgeted Rs 1.67 trillion.
Friday’s additional planned borrowing will bring the total for the fiscal year to Rs 5.1 trillion.
The revised bond market borrowing schedule, which traders had expected would be announced on Monday, will take place starting in the first week of January and run through the week of 5-9 March, the RBI’s new borrowing calendar showed.