Govt may now opt for bond issuances of longer tenures

Faced with huge redemption pressure in the shorter end, the government may go for more longer-tenure bonds to raise funds from the market in the next financial year. This, experts say, will also increase the borrowing cost.

According to Reserve Bank of India (RBI) data, redemptions worth Rs 84,000-2,56,000 crore are lined up for each year in the five to nine-year period. “I expect 60 per cent of issuances in the 10-14 year category,” said T S Srinivasan, general manager in charge of treasury at Indian Overseas Bank. The government has pegged its net borrowing target at Rs 4.79 lakh crore, which translates into gross borrowing of Rs 5.69 lakh crore after taking into account Rs 90,000 crore of redemptions in the next financial year.

Typically, the issuances are divided in four tenure buckets — 5-9 years, 10-14 years, 15-19 years, 20 years and above. While preparing the borrowing calendar, the maturing securities in these tenures are taken into consideration so as to avoid high redemption pressure on the government.

The weekly auction amount is also expected to increase to Rs 15,000-16,000 crore from Rs 10,000-15,000 crore in the current financial year. The borrowing calendar for the first half of financial year 2012-13 will be released early next week.

Bankers say the central bank also expects the government to issue more longer-tenure bonds and it has sounded out banks about such a situation. Typically, banks prefer shorter tenures over longer, as they have to keep the bond on their books for a smaller period.

In response to the market borrowing target announced in the Budget, RBI deputy governor H R Khan had said the amount was higher than the current financial year and would be challenging for the central bank.

He added RBI would deploy tools such as open market operations, cash reserve ratio and liquidity adjustment facility to manage liquidity conditions.

Market participants say 10-year benchmark bond yields are expected to touch nine per cent. As a lower rate is expected, the government’s cost of borrowing will rise if issuances are skewed towards longer tenures. The high borrowing itself, along with the expectation of open market operations to only be conducted in the latter half of the year, will keep yields high and increase the cost pressure.

Borrowing cost is already on the rise as the government stated in the Budget the weighted average yield in primary auction of dated securities in 2011-12 had gone up to 8.5 per cent from 7.9 per cent in the previous financial year. Yields had shot up to nearly nine per cent in the third quarter after the government revised the borrowing target. The Reserve Bank had to buy over Rs 1 lakh crore of illiquid bonds via open market operations to sooth rising yields.

On Thursday, yields on the 10-year benchmark government bond closed at 8.38 per cent. Money markets were shut on Friday on account of a public holiday.

The high borrowing programme has also raised questions on banks’ ability to accumulate more bonds, as they already have more government securities than mandated.

“Banks are already in excess SLR mode to the tune of three-four per cent of NDTL (net demand and time liabilities) and a pick-up in credit demand will result in these funds being used for productive purposes. It is also considered inefficient if RBI provides funding through the liquidity adjustment facility counter for excess SLR investments on a regular basis,” said Moses Harding, head, asset liability committee and economic & market research, IndusInd Bank.