The government On Thursday said it would borrow Rs 2,41,000 crore during the first six months of the next financial year, which was two-thirds of its gross market borrowings of Rs 3,62,000 crore. This is two-and-a-half times the borrowings of Rs 96,000 crore during the first half of this financial year.
The front loading of borrowings has led to fears that the government might end up tapping the credit market for more than what was budgeted. This could increase the yield on government securities, dealers said.
It was already in evidence On Thursday as yield on 6.05 per cent 2019 government paper rose 25 basis points to 7.02 per cent, the highest since the bond was issued on February 2, Bloomberg data showed.
The large supply of government paper has meant that yield on 10-year paper has increased by 216 basis points from a record low of 4.86 per cent touched on January 5. The steep rise in yield is going to erode the value of the bond portfolio of banks and their fourth-quarter profits will face pressure.
Market sentiments were also affected as Rs 1,300 crore of the Rs 7,000-crore 6.05 auction devolved on primary dealers On Thursday. The Reserve Bank of India, however, sold the entire Rs 5,000 crore of 7.27 per cent, 2013 paper at a yield of 6.77 per cent.
During the current financial year, the government is expected to borrow around Rs 3,06,000 crore from the market, as against Rs 1,00,571 crore projected at the start of the year.
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In a statement issued this evening, RBI said that during the first half, through its open market operations, it intended to purchase government securities to the tune of Rs 80,000 crore in the first half. Of this, purchase of government securities of Rs 40,000 crore is envisaged for the first quarter .
Unwinding of market stabilisation scheme would be to the tune of Rs 42,000 crore, of which Rs 37,500 crore would be in the first quarter.
According to the government borrowing programme finalised after a meeting between the RBI Governor and Finance Ministry officials On Thursday, during the next financial year, the Centre will raise Rs 48,000 crore every month during the first quarter and Rs 32,000 crore a month during the second quarter of the year.
It will use around Rs 1,01,000 crore to meet the redemption and coupon payments during the first half of 2009-10.
“The higher amount in the first three months is based on the fact that redemptions are more in the first quarter,” Ashok Chawla, economic affairs secretary, Finance Ministry, said.
Asked if the government would look at private placements to reduce the pressure on the primary markets, Chawla said, “There is absolutely no need for private placement and therefore it is not on the agenda. It is not required.” The fund requi-rements would be met through normal borrowings , he added.
In addition, it was decided that the limit for ways and means advances (WMA) will be Rs 20,000 crore during the first half and Rs 10,000 crore in the second half.