RBI moves in to control spurt in bond yields

The Reserve Bank of India (RBI) stepped in this evening to soothe market sentiments after the government’s intention to borrow over Rs 4,00,000 crore during the current financial year pushed up bond yields.

RBI Deputy Governor Shyamala Gopinath told news agencies there was ample liquidity in the system and the central bank did not see any unusual movement in yields in the coming days. Ruling out private placement, the RBI deputy governor said the borrowing would be undertaken in a non-disruptive manner.

The finance ministry and the RBI would soon meet to finalise a new borrowing calendar to ensure adequate credit flow to productive sectors, Gopinath said.

In New Delhi, Finance Secretary Ashok Chawla said the government would meet at least half its gross borrowing requirements through open market operations

“It (higher borrowing) has to be supported by open market operations, at least by 50 per cent. It will be done in a manner in which it causes the least disruption,” Chawla said.

With fiscal deficit pegged at 6.8 per cent of the gross domestic product, as against 5.5 per cent of GDP in the Interim Budget, the yield on government paper shot up over 20 basis points across various maturities. Finance Minister Pranab Mukherjee’s borrowing programme for 2009-10 was higher than what the market was expecting.

The yield on the benchmark 10-year security —6.05 per cent paper maturing in 2019 — closed at 7.03 per cent compared with 6.83 per cent on Friday, according to data from the Negotiated Dealing Platform.

For the current financial year, the government has budgeted for borrowings of Rs 4,00,996 crore, 22.81 per cent higher than the revised estimate of Rs 3,26,515 crore in the last financial year and over three times the 2007-08 figure. Compared with the estimate of Rs 3,32,835 crore in the Interim Budget, presented in February, borrowings are expected to be 20.47 per cent higher.

Bloomberg adds, the rupee slid after the government forecast the widest Budget deficit in 16 years, increasing the risk of a cut in sovereign ratings.

The rupee weakened by 1.3 per cent, the most in almost six weeks, to 48.5375 against the dollar.

Dealers said the market would be flooded with government paper. The extent of borrowings is about Rs 40,000 crore than what the marker had estimated. This will push up yields in the near term.

The impact of higher borrowings would not be limited to government paper and companies would also have to access funds at a higher cost, said market players.

“If state governments are going to borrow at above 8 per cent, then companies will have to shell out more,” said S Srinivasaraghavan, head of treasury with IDBI Gilts said.

Meanwhile, the RBI announced auction of bonds worth Rs 15,000 crore, including fresh issue of 10-year paper worth Rs 6,000 crore. The auction is scheduled for Friday. It is expected to indicate emerging trends in the yield for the benchmark paper.

The currency might slide to 49 in the short term, Calyon’s Barbe said.