India likely to implement debt swap in February - sources

By Neha Dasgupta

MUMBAI (Reuters) - India is likely to implement its planned 500 billion rupee debt swap plan only after the government's yearly borrowing programme concludes in February, two officials aware of the country's plans said.

India was expected to hold off on its first debt swap because the current period of volatility in bond markets could make it less successful, the officials said.

The government announced the planned debt swap under the budget unveiled this year. It would involve buying short-end bonds and selling an equivalent amount of longer maturity debt in a fiscally neutral action intended to ease near-term redemption pressures on government finances.

However, longer-end bonds were currently less attractive because of market expectations the central bank would continue raising interest rates after its 25 basis point hike last month, said an official.

"The market is showing uncertainty as of now, so it would be better to have it (debt swap) after the borrowing is over," said one of the officials involved with the process who was not authorised to publicly discuss the deliberations.

The officials said only if longer-end bonds rally would the the country reconsider its currently timing plans. India's government makes the final decisions but the central bank manages the country's debt programme.

India may also consider making debt switches a more permanent feature to better manage redemptions and liquidity, the officials added.

"It has to be looked at from the market development perspective also, not just as a one-off," said one of the officials.

Under the budget for the fiscal year ending in March, the government plans to borrow a total of 5.79 trillion rupees by February 7, leaving around seven weeks to conduct the debt swap.

The government has already announced it will buy back shorter-end bonds due to mature between 2015/16 and 2017/18 fiscal years but has not announced which longer-end bonds it will target to sell.

India's benchmark 10-year bond yield has risen around half a percentage point this year.

(Editing by Subhadip Sircar and Nick Macfie)