Borrowing plan stumps gilt traders; bear hug to continue

It wasn't expected to be a dream budget, but it was also not expected to be government bond traders' nightmare. The market is bracing for an extended bear run after finance minister P Chidambaram's Budget set a stiff market borrowing for 2006-07 and failed to comfort players on the liquidity front, economists said.

"Given the narrower-than-anticipated fiscal deficit target of 3.8 per cent of GDP, the bond market will be somewhat dismayed at the Rs 1.14 trillion net borrowing plan, a 13 per cent increase from current year's plan," Siddharth Mathur and Rajeev Malik, strategists at JP Morgan Securities said in a report.

India's fiscal deficit in 2006-07 (April-March) has been pegged at Rs 1.487 trillion or 3.8 per cent of the gross domestic product compared with revised estimate of Rs 1.462 trillion, or 4.1% of the GDP, in 2005-06.

The net market borrowing for 2006-07 has been set at Rs 1.138 trillion compared with the revised estimate of Rs 1.004 trillion in the current financial year.

In gross terms, the government borrowing through dated securities is projected at Rs 1.529 trillion for next year, higher compared with the revised target of Rs 1.360 trillion in the current financial year.

So far in 2005-06, the government has borrowed Rs 1.21 trillion through dated securities, implying it could raise Rs 150 billion in March.

"The first concern for the market is the balance borrowing for this financial year," Indranil Pan, economist at Kotak Mahindra Bank said.

"That is going to hit the market first and once that is over, the market will be faced with next year's borrowing." "Fewer redemption under the MSS (Market Stabilisation Scheme) next year suggest a more challenging borrowing environment in the coming year," Mathur and Malik said.

"Total net market borrowing will rise by 55 per cent in FY07 even if there is no further issuance under the MSS."

The two-month-old crunch in the system is expected to spill over to the next month following the additional borrowing. Corporate and advance tax payments for March will add to the tightness in liquidity.

"Unless the government starts spending for the various expenditures that it has planned in the budget, money will not come into the system and there will be a paucity of funds," Rupa Rege-Nitsure, economist at Bank of Baroda said.

"Any kind of supply is bearish for the market," Abheek Barua, chief economist at ABN AMRO Bank said.

"This is because market is looking at factors other than the good fiscal numbers. The market is looking at credit growth and liquidity constraint, so if there is a supply of just Rs 1,000 crore, it is bearish for the market."