Govt seeks extra net spend in FY11, bond market not excited

Govt seeks extra net spend in FY11, bond market not excited

New Delhi: The government’s move to spend additional money in the current fiscal year ending in March failed to cheer the bond market on Monday in the face of the severe cash crunch in the banking system.

The government on Monday sought approval to spend a net additional Rs19,812 crore ($4.39 billion) in the 2010-11 fiscal year.

Finance minister Pranab Mukherjee told Parliament the gross additional spending nod sought was for Rs44,946 crore and it will not increase 2010-11 fiscal deficit, which the government aims to limit to 5.5% of gross domestic product (GDP).

“There may not be much difference to liquidity. But of course some relief will be there when the money is released," said Ananth Narayan G, head of fixed income, currencies, commodities in south Asia for Standard Chartered Bank.

“Market did not react to this news as it is more important for the money to actually come in than just the announcement," he said.

Banks were borrowing a Rs1 lakh crore daily from the Reserve Bank of India’s repo window and bond and swap yields surged last week indicating the tight cash conditions.

The government has a budget target of spending Rs11.09 lakh crore in the current fiscal year.

Bond and swap yields were steady after the news on additional spending.

The benchmark 10-year bond yield was at 8.07%, steady from beforehand, and down 1 basis point on the day. The one-year swap was steady at 6.73%.

Later, Mukherjee said inflation was coming from the supply side and that the full effect of the central bank’s rate hikes was yet to be seen on inflation.

The finance minister also sought parliamentary approval for spending Rs5,000 crore towards compensation to fertilizer firms and Rs278 crore as cash compensation to state-run oil marketing firms for selling products below cost.

The government seeks legislative approval for spending amounts beyond what it estimates during the budget for the year. Generally, these additional sums are for increases in major expenditures like interest payments and subsidies. Mukherjee, while setting the 2010-11 fiscal deficit target in February, had said the gap would be partially funded through market borrowings of Rs457 crore.