Debt mart in a tizzy over Centre's borrowing plan

Higher government borrowing programme for the first half of the new financial year 2005-06 has sent jitters in the debt market.

The concern has aggravated with global cycle of rising interest rates, upward moving inflation rate and credit boom. Pegged at Rs 83,000 crore, the borrowing programme in the first half of the next fiscal year is 41 per cent higher than first half of this year.

Policy observers said that the Reserve Bank of India is confident of meeting the government borrowing programme, even if the pace of credit-pick grows faster and the United States increases its pace for rate hikes.

Global uncertainties like sharp spurt in oil prices, however, remains a concern. An informal estimate of the liquidity position in the market puts the surplus liquidity at around Rs 1,30,000 crore.

This includes the bids in the reverse repo, cash surplus parked by the government with the RBI, and roll overs in the market stabilisation scheme. Reverse repo is daily liquidity management tool of the RBI which helps it to suck out excess liquidity from the system.

Another reason comforting the entire Indian economy is that capital inflows will continue to sustain, given the economic fundamentals even after discounting the interest rate sensitive flows like that of the foreign institutional investors, stated observers.

A senior banker with a PSU bank goes further to add that it won't be a surprise if the Indian central bank chooses to cut 25 basis points in the reverse repo rate to promote growth which is the ultimate objective. The reverse repo rate is 4.75 per cent.

However, the views are mixed. JP Morgan, in its Indian market outlook and strategy, today has said "although we believe RBI will keep rates unchanged at the April policy announcement, despite comfortable liquidity, investor participation at auctions will be key. If banks continue to rotate portfolios away from bonds as we expect, the yield curve will shift higher and steepen."

Barclays said that given this heavy supply schedule, the government has tried to facilitate the market's reception of this supply, with finance minister Chidambaram saying that he does not expect to see any RBI rate hike over the next six months whereas a 25 basis points rate hike had been priced in by the market for the April 28 RBI credit policy announcement.