Govt to borrow Rs 3.7 lakh crore in H1

The government will borrow Rs 3.7 lakh crore from the market in the first half of 2012-13 through the sale of dated securities. This amounts to 65 per cent of the borrowing plan for the new financial year starting next month.

Market participants said on Tuesday yields were expected to tread higher if there was no policy rate cut by the Reserve Bank of India (RBI) in April-September 2012.

Keeping the overall higher borrowing target for 2012-13, the weekly auction amount has been increased to Rs 15,000-18,000 crore (Rs 150-180 billion) from Rs 10,000-15,000 crore (Rs 100-150 billion) in the current financial year. The majority of the issuances will be in the long-tenure bucket, according to the borrowing calendar released by RBI on Tuesday.

"Yields may trade at 8.70 per cent or higher in case there are no rate cuts by the RBI in the first six months of next financial year," according to T S Srinivasan, general manager (treasury), Indian Overseas Bank. "Post-rate-cut yields may soften to 8.25 per cent."

On Tuesday, yields on the 10-year benchmark bond closed at 8.5 per cent, three basis points higher than the previous close in anticipation that the government will front-load the borrowing programme, thereby drying up system liquidity. The yields have jumped 15 basis points since the close last week.

Auctions for four government securities will be conducted every week in April-September 2012,

against the three held in the corresponding period of the current financial year. "Issuance of four government securities every week gives flexibility for market participants," says N S Venkatesh, head of treasury, IDBI Bank. Reason: banks will opt for bonds up to 14 years' maturities, while insurance companies and pension funds may go for longer tenures. "This will also help maintain longevity of benchmark bonds," he adds.

The gross borrowings in the first half of the current financial year were Rs 2.5 crore - 60 per cent of the budgeted target of Rs 4.17 lakh crore. The borrowing plan was twice revised upwards in the second half, taking the gross borrowing to Rs 5.1 lakh crore.

Bond yields had spiked to three-year high levels of nine per cent on announcement of revision in the borrowing target.

RBI is expected to step in and support the market with open market operations (OMOs) in the second quarter of next financial year, so that the government borrowing programme passes smoothly. "Redemptions," notes Srinivasan, "will take care of liquidity tightness in the first half but there may be OMOs in August 2012."

According to RBI data, redemptions worth Rs 85,000 crore are lined up in the first half of 2012-13.

The central bank bought illiquid securities worth above Rs 1 lakh crore to manage liquidity and create room for fresh supply in 2011-12.