Slow credit, redemptions to help RBI push borrowing programme

Slow credit, redemptions to help RBI push borrowing programme

Mumbai: Bond market traders expect the Reserve Bank of India (RBI) to push through more than 60% of the gross government borrowing programme of Rs4.17 trillion in the first six months of 2011-12 so as not to disrupt the private demand for credit in the later half.

The borrowing programme in the first half of the year is slated for release on Friday.

The so-called front-loading of bond auctions are not new because RBI prefers the government complete most of its borrowing in the first half of the year when credit demand is usually slow.

This time around, a large-scale redemption of bonds in the first four months will also allow RBI to push through auctions.

As much as Rs37,000 crore worth of government bonds will come up for redemption between April and July and dealers expect RBI to be aggressive with its bond auctions in that period.

The government has budgeted for a gross borrowing of Rs4.17 trillion in 2011-12. Adjusting for redemptions, the net borrowing is Rs3.43 trillion. Besides, the budget has also provided for Rs15,000 crore worth of short-term treasury bills.

Dealers said RBI will try to time more borrowings around large redemptions so as to ensure that the extra liquidity generated because of the redemptions will be absorbed by demand for government securities.

“RBI will front-load 62% to 67% in the first few months because credit demand will be lean and redemptions (of bonds). Out of the Rs37,000 crore redemptions in the first four months, Rs35,000 crore are in July," said Nirav Dalal, managing director and country head, fixed income and debt capital markets at Yes Bank Ltd. Dalal expects an average of Rs12,000 crore of borrowings per week.

Barclays Capital analysts Siddhartha Sanyal and Kumar Rachapudi expect an average weekly issuance of Rs10,800 crore, excluding one week in mid-September as liquidity will be tight because of the second quarter advance tax outflows. Indian corporations pay advance tax every quarter on their projected profits.

“Around 50% of FY11-12 maturities will occur in July, making net issuance this month much lower than in other months. We think this could prompt the RBI to try and increase net issuance in July, while reducing it from June," Sanyal and Rachapudi said in a note on Thursday.

“The borrowing calendar will be somewhat similar to what was there in 2010-11 because the borrowing programme and other dynamics of the economy have remained more or less same as last year," said Ananth Narayan G, managing director and head of rates, fixed income South Asia, Standard Chartered Bank.

Narayan expects RBI to sell more floating rate bonds (FRBs) compared with last year. FRBs are called so because their coupons are reset every six months based on the prevailing similar maturity government bond yields.

“Market participants have been demanding more FRBs from RBI," said RVS Sridhar, head treasury at Axis Bank Ltd.

Inflation continues to be the overriding concern for the bond market. Latest numbers released on Thursday showed that the pace of food inflation had returned to double digits after a two-week gap.

Food inflation rose 10.05% compared with a year earlier in the week ended 12 March. It had risen 9.42% in the previous week.

“Inflation continues to be a concern on a macro level, besides that I do not see pressure on the government borrowing," said A. Prasanna, economist at ICICISecurities Primary Dealership Ltd.