3G funds may not trim govt borrowing much: Nomura

3G funds may not trim govt borrowing much: Nomura

Mumbai: The government is unlikely to reduce borrowing substantially despite the government’s windfall from the recently concluded telecom auctions, a senior market official told Reuters.

The government recently earned about Rs1 trillion by auctioning 3G and broadband spectrum, triggering speculation the funds may be used to trim borrowing and trim the fiscal deficit.

Instead the funds may be used towards fuel-price subsidies, said Nitin Jain, managing director and co-head of fixed income for Nomura Fixed Income Securities in India.

“There is an issue of petroleum-price linked subsidies, budgetary allocation for that subsidy is low... To that extent there is a need that the so called excess inflow from 3G and BWA auctions can go to," he told Reuters in an interview.

Government borrowing may reduce by up to Rs10,000 crore and not Rs25,000-30,000 crore which some analysts predict, he said.

“It could be just about one auction cancellation than the initial budgeted number," Jain added.

The government plans to borrow a gross Rs4.57 trillion in 2010-11 and has borrowed Rs1.36 trillion so far.

Liquidity, which has tightened following the auction payments, may ease in the next two weeks, he said, adding that the surplus may not immediately rise to levels seen in May. “Liquidity levels seen in mid-May will take a long time to return, not before August and this would be through government spending only," Jain said.

The 1-year overnight indexed swap (OIS) rate which rose to a 19-month peak of 5.62% on Friday would ease to 5.25% at the first sign of liquidity coming back.

On an average cash flow was around Rs40,000-50,000 crore until early May as indicated from the daily liquidity adjustment facility window of the central bank.

Inflation, Yields

Long-term bond yields, on the other hand, will ease only if inflation shows a declining trend by August.

“The liquidity-linked flattening has been achieved, now we have to see in the next six months if the longer tenor starts falling and there is a flattening of the curve," Jain said.

The benchmark 10-year bond yield had risen to a 18-month high of 8.13% in mid-April on expectations of aggressive policy tightening but since eased and has been hovering around 7.60% this week.

“We are looking at domestic inflation, global growth and hence the impact on the global commodity prices and that will fundamentally determine the direction of long-end yields in India," Jain said.

The wholesale price index (WPI) rose an annual 10.16% in May, the highest in any G-20 nation, but Prime Minister Manmohah Singh said last month that headline inflation could fall to 5-6% in December.

However, Jain expects the Reserve Bank of India (RBI) to hike 25 basis points ahead of the policy review and another tranche of 25 basis points in the policy.

With inflation forecasted to ease, “the pressure on RBI not to hike will be very high in a declining inflation scenario but RBI may still argue that we are still not at a neutral rate."

Rate Hike

In the current scenario, the best investment strategy would be to have very short-term views and watch both global markets and domestic liquidity conditions closely and be ready to flip positions quickly, said Jain.

The RBI has raised rates twice, by a total of 50 basis points, since mid-March to tame inflation and a Reuters poll said the central bank may deliver another hike of at least 25 basis points at the 27 July policy review.

A panel of ministers is due to meet on Friday to decide on fuel prices, which may push inflation higher.

“If they choose to hike (fuel prices) then there is definitely a rate hike in the waiting from the RBI," Jain said.