Gilts: Low credit demand, OMOs play saviours in FY12

Higher borrowing expected in the next financial year

The government’s market borrowings for the current financial year may have come to an end, with the last scheduled auction carried out on Friday.

Market participants said bond yields moved largely in an orderly fashion, despite higher borrowing due to proactive measures by the Reserve Bank of India (RBI).

Open market operations (OMOs) and diversion of bank funds in the absence of credit demand helped markets absorb the heavy supply of government securities this financial year.

So far this financial year, the government has borrowed Rs 73,000 crore through the sale of dated securities, 16.7 per cent more than in the previous financial year. RBI purchased illiquid securities worth Rs 113,949 crore through OMO auctions .

“OMOs helped manage the yields, despite higher market borrowing this year,” said Jayesh Mehta, managing director and treasurer, Bank of America. Devolvement on primary dealers also increased this financial year.

N S Venkatesh, head of treasury, IDBI Bank, expects yields to close at around 20-30 basis points higher on March 31, compared with 7.9 per cent in the year-ago period.

He said the demand for government securities from banks also helped keep yields under check.

According to RBI data, the growth in banks’ investments in government securities was higher than the growth in bank advances. “There wasn’t much demand from the private sector because of the slowdown in overall economic activity,” said Venkatesh.

Currently, banks’ SLR holdings are expected to be at around 29 per cent.

This financial year, two 10-year benchmark bonds were introduced, compared with only one in 2010-11. This, too, helped manage yields.

Economists Siddhartha Sanyal and Rahul Bajoria of Barclays Capital expect subdued revenue, high and sticky expenditures and stubborn deficits in 2012-13. “We expect the gross fiscal deficit to hover at around 5.2 per cent of GDP in 2012-13.

STATE OF AFFAIRS
Government bonds	FY11	FY12 (till date)
Gross borrowing (Rs  crore)	437,000	510,000
Net borrowing (Rs  crore)	325,414	439,033
OMO purchases (Rs  crore)	67,246	113,949
Devolvement on primary dealers (Rs  crore)	4,386	11,387
Growth in SLR holdings of banks (% as on Feb 24)	7.7	17.4
Bank credit growth (% as on Feb 24)	23.3	15.6
10-year bond yield range (%)	7.37-8.25	7.94-8.97
Last bond sale auction*	11-Feb-11	Mar 9,2012
*According to the auction calendar                 Source-RBI, Bloomberg, STCI Primary Dealer

That level would lead to a net and gross market borrowing of dated securities of around Rs 4.75 lakh crore and Rs 5.65 lakh crore, respectively,” they said.