Year-end concerns , govt borrowing plan to impact bonds

A huge borrowing programme by the government announced on March 26 and banks’ focus on minimising the impact of hardening of yields on their books at the close of the current financial year are expected to influence trading in the government securities this week.

The first two days of the week are expected to keep banks occupied with the year-end issues. So, they will not be inclined to take risks, according to dealers.

Last week, yields hardened sharply on the 8.24 per cent note due 2018 from 6.87 per cent to 6.96 per cent, while the yield on the ‘6.05 per cent 2019’ paper, the new benchmark, rose from 6.87 per cent to 7.02 per cent.

Government bond prices fell for a sixth day on Thursday after the Centre announced that it would borrow Rs 2,41,000 crore in April-September. The government’s gross market borrowing in 2009-10 is estimated at Rs 3,62,000 crore.

Dealers said the huge borrowing programme was going to leave very little room for trading. Earlier, the market used to get some free time to carry out genuine trading after each auction, but with the present size of the borrowing, it would be hit with auctions every week.

According to a dealer with a large public sector bank, the Reserve Bank of India (RBI) is "quite aware about the pressure" that the huge borrowing will exercise on the market. RBI would purchase securities worth Rs 80,000 crore in the April-September period. It was also expected to unwind the Market Stabilisation Scheme securities worth Rs 42,000 crore in the six-month period. These two steps should release resources to support the bond market to absorb the huge supply of the government debt, dealers said.

Liquidity to remain adequate
The call rates may see less pressure as the financial year-end concerns are expected to ease in the early part of the week.

Last week, the money market rates hardened, tracking tight liquidity in the system. The call range ruled between 4.25-5.00 per cent, above the reverse repo of 3.5 per cent. The overnight collateralised borrowing and lending obligation (CBLO) rate was seen in the range of 1.25-4.0 per cent.

During the week, RBI absorbed Rs 13,750 crore under the reverse repo operation as part of the liquidity adjustment facility (LAF). It infused Rs 2,600 crore under LAF repo operation.