Bond yields near 2-month high

The government on Thursday announced the borrowing plan for the second half of the current financial year, and this was higher by Rs 52,800 crore than what was planned earlier. Yields on 10-year benchmark government bonds jumped by 10 basis points after the announcement and closed at 8.44 per cent, as the additional borrowing was much higher than market expectations.

“The borrowing plan for the second half was surprising and disappointing. It was expected the government would borrow more, but this extent of additional borrowing was not expected. There were expectations that the government would try to stay within limits by curtailing expenditure,” said Nirav Dalal, managing director, debt (capital markets & financial markets), Yes Bank.

Market participants expect yields could inch up further next week. “Yields may go up to 8.48-8.50 per cent because of higher borrowing, coupled with expectations of another rate rise of 25 basis points next month,” said Pawan Bajaj, general manager, Bank of India. The Reserve Bank of India (RBI) is slated to announce the second quarter review of monetary and credit policy on October 25.

From October, the government would borrow an average of Rs 13,000 crore every week as compared to average weekly borrowing of Rs 11,000 crore in the first half. “In terms of liquidity, the market would be able to absorb Rs 1,000 crore of additional borrowing every week, though the cost of borrowing will go up,” said Bajaj. Also, in the absence of higher credit growth this year government may find room to fund its needs from the market.

The government has so far borrowed Rs 2.5 lakh crore through the sale of dated securities. According to the issuance calendar released on Thursday, RBI would auction Rs 2.2 lakh crore worth of government securities in October 2011-March 2012, with higher issuances in the 10-14 year tenor. However, the government has trimmed borrowing via treasury bills in the second half of 2011-12 by Rs 15,000 crore. “This should ease some pressure on yields in the short term debt segment,” said a treasury dealer with a Mumbai-based public sector bank.

RUPEE DROPS
The rupee completed the biggest quarterly drop since 2008 on concern that investors would sell emerging-market assets, as Europe’s policy makers struggle to stem the region’s debt crisis.The currency dropped the most in a week on Thursday, as exchange data showed global funds pulled a total $5.6 billion this month from the stock markets of India, Indonesia, South Korea, Taiwan and Thailand. The rupee weakened 8.8 per cent this quarter to 48.9725 at the close in Mumbai, the biggest drop since the collapse of Lehman Brothers Holdings Inc in September 2008, according to Bloomberg data.