Yields on the 10-year benchmark government bond shot to four-month high of 8.63 per cent on Wednesday on announcement of the borrowing plan for the first half of next financial year.
The government will borrow Rs 3.7 lakh crore or 65 per cent of the amount budgeted for 2012-13, according to the calendar released yesterday after market hours.
On Wednesday, bond yields closed at 8.62 per cent, 12 basis points higher than the previous close.
“Bond market is weak after the announcement of the bond issuance calendar for the first half of the next financial year. Market was prepared for 60 per cent (Rs 3.4 lakh crore), but RBI chose to front-load 65 per cent at Rs 3.7 lakh crore,” said Moses Harding, head of ALCO and Economic and Market Research, IndusInd Bank.
The government had raised Rs 2.5 lakh crore in the first half of the current financial year, which was 60 per cent of the budgeted target of Rs 4.17 lakh crore. However, with two upward revisions in the second half, the government raised Rs 5.1 lakh crore in 2011-12. Gross borrowings in 2012-13 have been pegged at Rs 5.69 lakh crore.
“Yields will remain under pressure until liquidity eases significantly,” said Madan Sabnavis and Samrudha Paradkar, economists at CARE Ratings.
A senior treasury official of a public sector bank said government bond yields could go up to 8.75 per cent if liquidity did not improve.
The Reserve Bank of India (RBI) is expected to step in with bond purchases via open market operations (OMOs) in the second quarter of the next financial year. According to the borrowing calendar, auctions worth Rs 75,000 crore are scheduled in August 2012.
In 2011-12, RBI bought illiquid government securities worth more than Rs 1 lakh crore to manage liquidity and create room for fresh supply.
According to the borrowing calendar, government securities worth Rs 15,000-18,000 crore will be auctioned every week. The amount was Rs 10,000-15,000 crore in the current financial year.
RBI on Wednesday said it will auction government securities worth Rs 18,000 crore on April 3, 2012. Liquidity deficit is now close to Rs 2 lakh crore despite reduction in cash reserve ratio by 125 basis points since January 2012. Today, banks borrowed Rs 1.63 lakh crore from RBI under the liquidity adjustment facility.
The central bank will conduct additional liquidity adjustment facility operations on March 30 and 31 to help banks manage liquidity under year-end pressure.
