PDs see devolvement in coming week

The government is due to borrow Rs 11,000 crore next week .

Senior officials at primary dealerships on Thursday said that the next week’s government bond auctions could devolve if the government didn’t curtail the size of the borrowing.

The government is due to borrow Rs 11,000 crore next week and another Rs 15,000 crore in the week to June 25. This week itself the government would raise Rs 11,000 crore by selling three dated securities on Friday. “Nobody expected the kind of outflows we have seen in the past few days,” said Pradeep Madhav, Managing Director, STCI Primary Dealer.

Liquidity in the banking system has come under pressure following huge payments—around Rs 67,700 crore—to the government for 3G spectrum fees last week. Together with the broadband auction, the government would raise over Rs one lakh crore from spectrum sales compared to the Union Budget estimate of Rs 35,000 crore. Pressure on liquidity will mount when companies pay the first installment of corporate advance tax on June 15.

“Even some of the big banks seem to borrowing currently. So it makes perfect sense now for the government to truncate the borrowing calendar,” Madhav said.

An indication of the cash tightness can be gauged from the fact that India’s largest lender—the State Bank of India—which was flush with liquidity till a few weeks ago has been tapping the market and the Reserve Bank of India’s (RBI) repo window for funds. To reduce the burden on the system, the government has reduced the quantum of Treasury bills to be auctioned in June by Rs 22,000 crore. Earlier, RBI had allowed banks to seek waiver of penalty interest if their Statutory Liquidity Ratio dipped to 24.5 per cent from the mandated 25 per cent.

Market participants said that as the government was flush with funds following the payment of 3G spectrum fees, it would have the leeway to deviate from the announced borrowing plan.

“What is the point of building up of more and more cash surplus when the banking system liquidity is already under a lot of strain,” said a senior official with a foreign primary dealership. Some market participants, in fact, advocate cancellation of bond auctions altogether. “The cash position of the government is such that they can afford to reduce the borrowing in the first half and postpone it to the second half,” the dealer at the foreign primary dealership said.

The government plans to borrow a gross amount of Rs 4.57 lakh crore in 2010-11, of which Rs 2.87 lakh crore were expected to be raised in April-September. Tweaking of the borrowing calendar may also help the government lower its fund-raising costs, players said.

The redemption of bonds lined up for the coming months may create the demand needed to push bond yields lower, alongside the still subdued credit needs.

Around Rs 49,515 crore of bonds are due for redemption in July. However, not all market participants are expecting a change in the government’s borrowing plan.

“I feel the government should stick to its borrowing plan and finish off as much borrowing as it can in the first half because it needs elbow room to respond to negative global developments,” said a senior official at another foreign primary dealership.

The Greece-led sovereign debt crisis in Europe has already spread to Hungary, Spain and Portugal, and now appears set to cross the English Channel and hit the United Kingdom, if Tuesday’s announcement by Fitch Ratings is any indication.

These developments could curb capital inflows into India and, thereby, cloud the medium-term outlook on liquidity.