Market cheers lower borrowings

BORROWINGS & INTEREST RATES: Yields on a decline, but rate rise fear weighs

In his Budget, Finance Minister Pranab Mukherjee on Monday pegged the net government borrowings at Rs 3.43 lakh crore, lower than the Rs 3.45 lakh crore budgeted last year.

The announcement facilitated a relief rally in the bond markets with the yields on the 10-year benchmark 7.80 per cent gilt declining to 7.97 per cent before closing the day at eight per cent, compared to 8.07 per cent on Friday.

“We can expect yields to go down to the 7.80-7.85 per cent range by March-end,” said Anjan Barua, deputy managing director and group executive- global markets, State Bank of India.

Fiscal deficit of 4.6 per cent of the GDP for 2011-12 works out to Rs 4.12 lakh crore and the Central Government debt as a proportion of GDP is estimated at 44.2 per cent for FY12.

However, in the light of high inflation, rising interest rates and liquidity deficit, the market would like to wait and watch. “This may just be a temporary relief. We will have to see Reserve Bank of India’s take on growth numbers and steps it would take to curb inflation in March,” said R V S Sridhar, head-global markets, Axis Bank.

The debt financing strategy for 2011-12 has been formulated after factoring in the government’s comfortable cash position this financial year as well as the inflationary expectations in the economy, the government said in its budget document.

On the back of non-tax revenues generated by 3G auctions, the government has been able to trim its market borrowings this year. Up to February 27, the central government’s gross and net borrowings have reached Rs 4,37 lakh crore and Rs 3.25 lakh crore, respectively.

A section of the market expects the actual borrowing numbers to be higher than stipulated by the government. “They have under-provided for oil subsidy. The actual under-provision could be to the extent of Rs 50,000-60,000 crore which may result into a higher net borrowing. The fiscal deficit may come to around five per cent for FY12,” said Sachchidanand Shukla, economist, Enam Securities.

To keep the borrowing numbers within target in case of a further rise in oil prices, the government may have to pass on the cost to consumers. “The oil subsidy numbers seem too unrealistic unless they decide to pass on the high cost to customers. Given the current inflation, this will not happen immediately,” said C Rajendran, general manager looking after treasury operations of Corporation Bank.

As always, the government may also front load the borrowing program in FY12. “We will have to wait and see in April if banks have an appetite to buy more government securities because most banks are now sitting on three per cent excess statutory liquidity ratio,” said Rajendran.

For banks, the conditions may be better in the next fiscal with yields not expecting to go beyond the eight per cent level. “For banks, the risk of large mark-to-market loses will be lower next fiscal,” said Vaibhav Agarwal, vice-president (research), Angel Broking.

Rupee
The rupee rallied for the second day with the finance minister announcing plans to pare the budget deficit and allow more foreign investment in bonds.

The rupee appreciated 0.1 per cent to 45.27 per dollar to close the day, Bloomberg data showed. “The budget has some positive news for the rupee — mainly the decision to allow more financial fund flows and the planned reduction in the fiscal deficit,” said Priyanka Chakravarty, a foreign-exchange strategist at Standard Chartered Bank. “The rupee may push moderately higher in the coming weeks.”

Call
The interbank call money rate ended marginally up on Monday on account of high demand from banks to meet their reserve requirements for the new reporting fortnight. The one-day call money rate ended at 6.85-7.00 per cent, compared with 6.85-6.90 per cent on Saturday for two-day loans. Collateralised Borrowing and Lending Obligations (CBLO) ended at a weighted average rate of 6.49 per cent, compared to 6.59 per cent on Saturday.