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| FinMin worried as yields rise even before FY11 borrowings begin |
| Newswire18 / New Delhi Mar 12, 2010, 00:34 IST |
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The Ministry of Finance is perplexed that bond yields have surged, although the government has earmarked, what it believes, a significantly lower net market borrowing for the next financial year.
Finance ministry officials say the yield on the 10-year government bond crossing 8 per cent, even before the government began its market borrowing for the year, is a cause of concern. On Wednesday, the 6.35 per cent, 2020 gilt ended at 7.98 per cent.
“I keep talking to the Reserve Bank of India officials everyday on yields. They keep saying they are hardening because of inflationary expectations,” said a finance ministry official.
“We continue to be worried on account of high yields despite lower borrowing for next year and no issuances for quite sometime now,” the official said.
“We have also kept the meeting on the borrowing calendar on March 29, the fag-end of the month. We don’t want the market to play around with this too much,” said the official on condition of anonymity.
Government bond yields have been rising amidst thin volumes on view that government’s market borrowing for next year, although lower in net terms, is larger than the current year in gross terms.
The government has said it will borrow Rs 3.45 lakh crore on net terms in 2010-11. Next year, it has to also borrow to refinance Rs 112 crore of retiring bonds. For 2009-10, the government’s net and gross borrowings were Rs 3.98 lakh crore and Rs 4.51 lakh crore respectively.
The official also rued the fact that unlike this year, borrowing for 2010-11 was not funding the entire fiscal deficit.
In the current year, borrowing of Rs 3.98 lakh crore funded 96 per cent of the revised fiscal deficit of Rs 44.14 lakh crore. Next year, the borrowing of Rs 3.45 lakh crore will fund 90 per cent of the fiscal deficit of Rs 3.81 lakh crore.
Yields have been rising also because of concerns that RBI will raise interest rates in April to curb inflationary pressures. Some government officials have said inflation will touch double digits before it begins to taper off. Some officials from RBI also admitted that the central bank’s projection of 8.5 per cent inflation in March seems “conservative’.
“The rise in yields since the Budget has been mainly a trading game. The yield rise has more to do with shorting in the market because of bearish sentiment. It being year-end and because of absence of clarity on the calendar, investors are staying away,” said S Srinivasa Raghavan, head of treasury at IDBI Gilts.
“I think fundamentals will come into play only in April once the calendar is out and the year-end is over,” he said and added that until the end of this month, the 10-year yield could hover in 7.9-8 per cent band.
Another senior finance ministry official had informed earlier this week that the yield of 8 per cent on the 10-year gilt was a “bit disturbing” and they would be comfortable if the yield settled around 7.5 per cent for the benchmark.
Yet, sensing that yields could harden, the finance ministry has pegged average cost of borrowing for the next financial year at around 8 per cent, compared with 7.26 per cent this year.
“We could have kept it at 7.75 per cent, but it is better to err on the side of caution,” the official had said.
According to RBI data, the weighted average yield of government bond issuance during April 1 to January 22 was 7.23 per cent. In the same period the previous year, the weighted average yield was 8.03 per cent.
The average cost of issuance in 2007-08 and 2008-09 was 8.12 per cent and 7.69 per cent, respectively.
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