Liquidity may come under pressure as the amount in weekly auctions of government securities goes up with the increase in the yearly borrowing target, and likelihood of completing 60 per cent of the programme in the first half of the next financial year.
The Reserve Bank of India (RBI) would release the borrowing calendar for April-September next week, after talks with the finance ministry. For 2012-13, the government has pegged net market borrowings at Rs 4.79 lakh crore, which translates into gross borrowing of Rs 5.69 lakh crore. Manoj Rane, head (fixed income and treasury), BNP Paribas, said, “This means there could be a weekly auction of Rs 15,000-16,000 crore.”
Weekly auctions stood at Rs 10,000-12,000 crore in the first half of the current financial year. This was stepped up to Rs 12,000-15,000 crore, owing to the upward revision of the yearly target in the second half. The government is expected to front-load the borrowing programme in the first half of the next financial year.
T S Srinivasan, general manager (treasury), Indian Overseas Bank, said, “The government may borrow about 60 per cent of the target, or about Rs 3.4 lakh crore, in the first half of 2012-13.” In the current financial year, the government had borrowed about Rs 2.5 lakh crore, 60 per cent of the budgeted target of Rs 4.17 lakh crore. However, the government ended up raising Rs 5.1 lakh crore in 2011-12. “This may add pressure on liquidity,” he added.
While liquidity pressure may ease in the first week of April due to government spending, the markets would have to depend on lower credit off-take and open market operations (OMOs) from RBI for the rest of the period.
RBI deputy governor H R Khan had recently said Rs 60,000 crore was expected to flow into the system through redemptions and state transfers in the first week of April. “The large government borrowing plan would be a challenge, but we have options like OMOs, the cash reserve ratio and the liquidity adjustment facility to manage the liquidity condition,” Khan said, while responding to the budgeted target for 2012-13.
“RBI is expected to conduct OMOs only if the liquidity conditions warrant so and if auctions don’t go smoothly,” said a treasury official of a large public sector bank. Typically, the government issues a new 10-year benchmark security in the initial few auctions in a financial year. This year, however, the new benchmark is expected later.
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“The current 10-year benchmark has room for one or two issuances. Hence, a new benchmark may be issued in the latter part of the April-June quarter,” the official said. As of now, Rs 56,000 crore has been raised under the current benchmark 8.79 per cent maturing in 2021. Typically, a security is considered illiquid after the issuances cross Rs 60,000 crore.
Markets expect yields on the 10-year benchmark government bond to stand at about 8.5 per cent with an upward bias, depending on the liquidity conditions and the central bank’s decision to cut the policy rate.
With yields expected to rise due to large supply, cost of borrowing for the government will also increase. In 2011-12, the weighted average yield in primary auction of dated securities was at 8.5 per cent, higher than 7.9 per cent witnessed a year ago.
The government attributed the rise in yields to RBI’s tight monetary stance, liquidity condition and higher borrowings in the current financial year. Traders said that rate cut actions by RBI in advent of easing inflation may result in lower yields.