Mumbai: India’s central bank will auction Rs15,000 crore worth of government bonds on Thursday, the last such auction in the first quarter (Q1) of the current fiscal. By the end of the bond sale, the government would have borrowed Rs1.62 trillion in the first three months of FY10.
Bridging deficit: Reserve Bank of India governor D. Subbarao.The central bank will auction Rs15,000 crore worth of government bonds on Thursday, the last such auction in the first quarter of the current fiscal. Tomohiro Ohsumi / Bloomberg
Incidentally, this is the sixth consecutive week that the Reserve Bank of India (RBI) is raising Rs15,000 crore from the market, higher than the originally envisaged Rs12,000 crore.
In the beginning of every fiscal, RBI publishes a borrowing calendar, outlining how much it wants to buy from the market every week and the tenure of securities.
The increase in the weekly borrowing programme has made many bond dealers believe that the government might raise its annual borrowing target. If that happens, there will be pressure on interest rates and yield on bonds will go up. Prices and yield on bonds move in opposite directions.
The yield on benchmark 11-year paper was 6.83% on Wednesday. According to dealers, it will cross 7% if there is a substantial increase in the borrowing programme.
However, if it goes up by around Rs20,000-25,000 crore, the market will remain stable as RBI has already raised Rs15,000 crore more that than what it would have, going by the borrowing calendar.
Besides, it will borrow additional Rs3,000 crore on Thursday.
RBI governor D. Subbarao refused to divulge any details about the borrowing programme or the extra weekly borrowing in a conference in Pune last weekend as these are “budget issues”.
The yield on government bonds will rise if the government plans to borrow more money from the market than what it had estimated in the interim budget presented in January.
The interim budget had estimated the annual government borrowing at Rs3.62 trillion and Rs2.41 trillion is slated to be raised in the first six months of the fiscal.
The government borrows from the market to bridge its fiscal deficit.
“My guess is that the total borrowing will be at most Rs4 trillion. This is including the extra weekly borrowings,” said S.S. Raghavan, head of treasury at IDBI Gilts Ltd, a firm that buys and sells government bonds.
According to Joydeep Sen, associate vice-president, advisory desk, BNP Paribas Pvt. Banking, if the borrowing is up to Rs4 trillion, the market will not be shocked, but if it is more than that, the traders will be disappointed.
Bond dealers are betting on the assurances given by Planning Commission deputy chairman Montek Singh Ahluwalia. According to him, the fiscal deficit will not be allowed to reach double digits. In 2009, the combined fiscal deficit of centre and states along with the off balance sheet items such as oil and fertilizer subsidies, was around 11%.
The market is interpreting Ahluwalia’s comment as an indication that the government will stay away from announcing fresh fiscal stimulus packages in the budget.
Last year, the oil and fertilizer subsidy as well as other off-budget items amounted to at least Rs2.18 trillion as global oil prices touched a record $146 (Rs7,081) a barrel, forcing the government to issue huge oil bonds to the oil marketing companies. Oil prices subsequently dipped to $38 a barrel.
Although it is now around $70 a barrel, government will likely be spared from doling out huge subsidies, pointed out Harihar Krishnamurthy, head of treasury at the Indian operation of South Africa based First Rand Bank.
According to Krishnamurthy, the advance tax collection prospects are also looking good as industries such as steel, cement, automobile and consumer goods are showing signs of recovery.
“The need and call for big bang government expenditure is very narrow now. I won’t be surprised if the government really doesn’t overshoot its present borrowing target,” said Krishnamurthty.
At the moment, the government is taking advantage of excess liquidity in the system. Banks are parking around Rs1.2 trillion of their surplus fund daily with RBI.
“Typically the government borrows in the first half and leaves the second half for corporations. Starting second half, inflation will go up and yields will start rising. It will also be costly for the government to borrow then,” said Raghavan of IDBI Gilts. “RBI is probably finishing the job entrusted to it at a cheap rate.”
According to Pradeep Madhav, managing director of STCI Primary Dealership Ltd, it is difficult to say how much will be the extra borrowing, but a figure in the region of Rs50,000 crore is possible. “The weekly extra issuances could be part of both the expected extra borrowing and the front-loading of the existing borrowing plan as the government would like to take advantage of the extra liquidity sloshing around presently.”
Madhav finds the upturn in the economy is some time away. Therefore, expectations are that the tax collections during this fiscal will be relatively muted. “It could be sometime before the government’s move towards divestment of public sector undertakings and auction of 3G spectrum can actually unfold,” he said.
In the meantime, issues such as pre-election commitments, social sector allocations and infrastructure spending apart from subsidies to oil and fertilizer companies can lead to temporary worsening of fiscal deficit and a larger borrowing programme.