3G sale sparks govt borrowing breather hopes

3G sale sparks govt borrowing breather hopes

Mumbai: Expectations that revenue from India’s auction of third generation (3G) mobile licences will exceed targets has sparked hopes among bond investors that the government will curtail borrowing in the first half of the year.

Though it is too early for the government or the central bank to decide whether to postpone any scheduled bond auction, bond yields may fall by 10 basis points if there is any such surprise announcement and flatten the yield curve, dealers said.

The government is scheduled to borrow Rs2.87 trillion during the first half the fiscal year that began 1 April out of a total Rs4.57 trillion for the full year, a record haul that has fatigued investors and sent yield on the 10-year bond above 8%.

“If the government is able to raise a higher amount of funds through 3G, then it may afford to skip one auction or postpone it," said Ananth Narayan G, head of rates and credit for South Asia at Standard Chartered Bank.

The government expects to generate around Rs500 billion from the 3G auction, far ahead of its budgeted estimate of Rs350 billion.

“The market has accounted for a lot of bearishness. So such news will obviously be a good news and bonds will rally," Ananth Narayan said.

However, if a one-time outflow of Rs500 billion to pay the government for 3G licences coincides with advance tax payments due in June, it may cause a severe strain on liquidity and send overnight rates sharply higher from existing levels.

A hefty redemption of around Rs340 billion of bonds in May and June may ease the shock.

The Indian banking system has around Rs500 billion of surplus cash, based on the daily amount parked by banks at the central bank’s reverse repo auction.

The Reserve Bank of India usually manages one-time liquidity tightness through its repo window, where it lends to banks against government bonds at rate that now stands at 5%.

The RBI has other liquidity management tools, including the cash reserve ratio (CRR) for banks, open market operations in bonds and intervention in the foreign exchange market.

However, it is not likely that the central bank will use these options because tools like open market operation and intervention in the foreign exchange market are used only to curb volatility in those specific markets, analysts said, while CRR is used as a blunt tool to manage liquidity on longer-term basis.

Yield curve

Dealers expect India’s yield curve to flatten if liquidity tightens sharply, with one-year yields seen rising more sharply than those at the long end of the curve.

However, if the government defers a bond auction, it may push down the 10-year benchmark yield while the one-year treasury bill yield may rise due to a cash crunch, thereby flattening the curve further, dealers said.

“If there is auction postponement, the combined effect of liquidity tightness and lower borrowing will flatten the yield curve," said A. Prasanna, economist at ICICI Securities Primary Dealership.

The yield curve has flattened since the announcement of the annual monetary policy on 20 April, with rate hikes pushing up yields at the shorter end. The government’s use of floating rate bonds and strong demand from insurers at the longer end has kept longer-dated bond yields contained.

The five year benchmark bond yield has risen by 17 basis points since 19 April 19, while the 10-year bond yield has risen just 5 basis points.