Govt unlikely to scale down auction size, feel players

A reduction in government's scheduled borrowing of Rs 10,000 crore due July 3-11 is unlikely despite the bearish sentiment in the bond market, a poll of 10 market players showed on Tuesday. Most money market players expect the government to go ahead with its borrowing plan to tighten liquidity.

"Highly unlikely," said the debt fund manager at a private sector mutual fund when asked whether she expects a cut in the borrowing amount.

During July 3-11, the government is scheduled to borrow Rs 6000 crore via sale of a 10-14-year security and Rs 4,000 crore through a 20-year paper auction.

Some hope of a reduction in the July auction size has emerged after the government said it had raised this month's second borrowing to manage liquidity. On June 22, the government raised Rs 9,000 crore via sale of two dated securities, up Rs 4,000 crore from earlier scheduled.

Thus far, the government has raised Rs 52,000 crore in the current financial year. It had set a target of Rs 89,000 crore for first half of 2006-07. Government officials had recently said the additional borrowing would be adjusted later in the year.

"Government has not categorically stated that it will adjust its borrowing in July itself," the fund manager at the private sector mutual fund said. They can do it any time in the remaining part of the borrowing programme, the fund manager said.

"There is no merit in cancelling the auction since RBI wants to keep liquidity in check," a senior debt fund manager at a foreign bank-sponsored mutual fund said.

Liquidity in the system has been strong with RBI receiving bids worth Rs 50,000-60,000 crore earlier this month in its reverse repo auction daily.

However, reverse repo bids in recent days have decreased to Rs 35,000-40,000 crore following advance tax outflows and the Rs 9,000 crore auctions. "There is no reason to cut the auction size," said a dealer at a primary dealership. "The full amount will come as they want to reduce liquidity."

Even as majority of debt market players expect the auction to be as per the scheduled amount, there are some who hope for a reduction, as it will comfort sentiment to an extent.

"There is a reasonable chance the borrowing will be curtailed," Nilesh Shah, chief investment officer at Prudential-ICICI Mutual Fund, said.

"We are hoping they will reduce the auction size by Rs 4,000 crore, as that is the extra amount they raised last time," Piyush Wadhwa, fixed income analyst at ICICI Securities, said.

"It is a function of what is their requirement and whether they are comfortable with the rise in yields."

Wadhwa expects the 10-year bond yield to stabilise around 8.00 per cent levels if the borrowing amount is reduced. But it could rise to 8.25-8.30 per cent if the size is not cut, he said.

"There will be no demand if the size is not reduced," a dealer at a U.K. bank said. "We are hoping for a cut of Rs 2,000 crore."

However, it does look unlikely the government will reduce the auction size this time around as liquidity is still plentiful.

"Every successive auction is going to be a bearish auction," said the fund manager at the foreign bank mutual fund, hinting the bearish outlook for interest rate markets.