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Govt may have stretched limit on gilt issue to Rs 80,000 cr

Newswire18  |  Mumbai 

Despite benchmark government bond issues having topped the Rs 60,000-crore informal limit, the government has not yet issued a new 10-year bond, as it may now be considering Rs 80,000 crore as the ceiling.

Contrary to expectations, the government sold the 8.79 per cent 2021 bond last week though issues had reached Rs 70,000 crore.

Then, a ministry official had said there was “more space” to issue the 8.79 per cent 2021 bond.

Banking industry officials said the informal limit had now been reset, keeping in mind the expansion in the economy, money supply, balance sheets of banks and market borrowing by the government.

So, with the issue of the current benchmarks — the 8.79 per cent 2021 and 9.15 per cent 2024 — reaching close to Rs 80000 crore, a new 10-year paper may be auctioned next week.

The 8.79 per cent 2021 and the 9.15 per cent 2024 bonds together contribute 80 per cent of daily trade volumes.

Issue of the 8.79 per cent 2021 bond currently is Rs 77,000 crore, and that of the 9.15 per cent 2024 bond will reach Rs 78,000 crore after this week.

Since November, the government has alternated between the 8.79 per cent 2021 bond and the 9.15 per cent 2024 bond at its weekly auctions.

Liquidity risk
Typically, when a bond nears the unofficial issuance limit, it loses favour due to concern that it may turn illiquid soon.

The main reason for restricting the issue is to limit the strain on the government's finances when the bond comes up for redemption.

Also, the issuer is looking to restrict the number of government bonds issued so that the papers do not quickly become illiquid.

As of now, there are 91 bonds worth a total of Rs 26 lakh crore that are issued. At the end of 2008-2009 (Apr-Mar), there were, 98 papers for a total outstanding of Rs 15 lakh crore.

“There is a reluctant to keep issuing new papers,” a industry official said. “The idea is to consolidate the papers. But there is a case for a new paper as the issue of the existing benchmarks has reached Rs 80,000 crore. There is no hard as fast rule, but what was Rs 60,000 crore earlier now appears to be Rs 80,000 crore.”

The sharp increase in the government's borrowing needs also supports the case for issuing more of a single paper.

If the government were to maintain the 600-bln-rupee limit for auctioninga stock, the shelf life of bonds would have been shortened to a great extent.

Roughly 45 per cent of the government's borrowing is carried out through issuancesof gilts in the 10-14 year segment, which means supply worth Rs 2 lakh crore is likely to be in this segment in the current financial year.

A new 10-year is due and it is going to be a star. At least, until Rs 80,000 crore of the bond are issued by the government.

First Published: Wed, May 16 2012. 01:23 IST