Bonds steady ahead of govt borrowing calendar

Yields on the 10-year benchmark government bond are expected to trade range-bound, ahead of the release of the government borrowing calendar this week. The Reserve Bank of India (RBI) will put out the market borrowing plan for the first half of the next financial year in consultation with the government on Tuesday.

On Thursday, yields on the 10-year benchmark government bond closed at 8.38 per cent. Money markets were shut on Friday because of a public holiday. “The supply side concern is back in focus, and it would need a combination of open market operations (OMOs) and cash reserve ratio (CRR) cuts to drive the bond market into a consolidation phase,” said Moses Harding, head-asset liability committee and economic & market research, IndusInd Bank. He expects yields to trade in the range of 8.3-8.45 per cent this week.

The government has budgeted Rs 4.79 lakh crore of net borrowing for the financial year 2012-13, higher by Rs 40,000 crore as compared to the net amount raised in the current financial year. The gross borrowing target comes at Rs 5.69 lakh crore with redemptions worth Rs 90,000 crore lined up for financial year 2012-13. Yields had shot up by 12 basis points on March 16, when the Budget announced higher-than-expected market borrowing programme.

In reaction to the targets, RBI Deputy Governor H R Khan had said the higher market borrowing programme was a challenge for the central bank. He said RBI has options like OMOs, CRR and liquidity adjustment facility (LAF) to manage liquidity.

Liquidity is expected to be tight, as banks may rush to cover reserve needs in the first week of the reporting fortnight. “Call money rates may again inch up to 10 per cent on high demand for funds,” said a bond dealer with a large public sector bank. The interbank call money rates had touched 10 per cent last week.

Banks may continue to borrow heavily from RBI this week. On Thursday, banks borrowed Rs 1.8 lakh crore in two auctions under the LAF at the repo rate of 8.5 per cent.