New Delhi: India ramped up its borrowing plan by nearly a quarter for the fiscal first half to September to bridge its growing budget deficit, but bond yields eased as the additional borrowing was below expectations.
After a meeting with finance ministry officials, Reserve Bank of India (RBI) deputy governor Shyamala Gopinath said on Thursday the government would borrow an additional Rs1.1 trillion ($22.6 billion) from next week up to 30 September.
That would take total April-September borrowing to Rs2.99 trillion, Rs580 billion more than the amount indicated in the tentative calendar in March.
The new figure means the government would have completed about 66% of its full-year record borrowing target of a record Rs4.51 trillion in the first half.
“If the government can raise additional revenue through disinvestment, second half borrowing may be less,” said Sonal Varma an economist at Nomura.
“Overall, the government and the RBI are trying to front-load the borrowing programme to avoid crowding out of private investments,” she said.
Loan demand typically picks up in the latter half of the fiscal year due to the harvest season and festival-related spending, and senior bond traders said 1- and 10-year bond spreads, which have steepened to a record 300 basis points, will now start flattening.
In its first budget last week after being re-elected with a stronger mandate, the Congress-party led government boosted spending on rural and infrastructure programmes, and projected the fiscal deficit to widen to 6.8% of gross domestic product, its highest in 16 years.
Asia’s third-largest economy is expected to post its weakest performance in seven years in 2009-10, which could hurt tax revenues. Analysts in a Reuters poll this week projected growth at 6.3%, below last fiscal year’s 6.7%.
Bond buybacks to continue
Gopinath said the borrowing would be done in 10 tranches and a calendar showed the borrowing was front-loaded, with the government to borrow RS120 billion for seven straight weeks until 4 September.
The central bank said it would continue to maintain ample liquidity in the banking system and it has bought Rs299 billion of bonds in open market auctions since 1 April, compared to its target of Rs435 billion for the first half of the fiscal year.
In its 6 July budget, the government raised its borrowing target by a quarter from an interim plan of Rs3.62 trillion, spurring market worry that private sector borrowers would be crowded out of the market and funding would be more expensive.
The yield on the most traded 6.90% bond maturing in 2019 eased six basis points to 6.79% from Wednesday’s close of 6.85%.
“The market was expecting Rs150 billion of supply every week and now we have only around Rs110 billion rupees of supply per week, so it is positive in the short term,” said Bekxy Kuriakose, head of fixed income at DBS Cholamandalam Asset Management.
Gopinath said the central bank would continue to buy back federal bonds from the market, depending on liquidity conditions.
Cash conditions have been ample since April due to slower credit growth, efforts by banks to boost their deposits by offering higher return rates and more spending by the government.
At Thursday’s daily money market auctions, the central bank accepted bids worth Rs1.28 trillion from banks, a sign of the heavy cash surplus in the money markets.