The government intends to borrow Rs 1,10,000 crore over the next 75 days, which will push up its first-half borrowings by Rs 58,000 crore from the earlier planned level.This means that the government will now borrow Rs 2,99,000 crore by the end of September through bond issues, which would account for around two-thirds of the Rs 4,51,000 crore the Centre proposes to borrow during the current financial year.
The revised borrowing calender finalised by the Reserve Bank of India and the finance ministry today has generally met with market approval. "Given the fact that the bond supply is large over a short duration, it is a positive sign," said Sandeep Bagla, senior vice-president at ICICI Securities.
The government had earlier indicated it would frontload its borrowings to ensure that there was enough space for private sector fund raising in the second half. So far, during the financial year, the government has raised market loans worth Rs 1,89,000 crore.
According to the revised borrowing calendar finalised today, the Centre will maintain its weekly borrowings at Rs 12,000 crore from July 17 to early September before tapering it to 8,000 crore in the last week of September.
Though Finance Secretary Ashok Chawla had earlier indicated that half the borrowings would be supported by the Reserve Bank of India's open market operations, in a statement, the central bank said that for the moment, the OMO estimate of Rs 80,000 crore for the first half of the year was being retained.
Stating that the endeavour was to maintain adequate liquidity in the system, the central bank said: "It is reiterated that the Reserve Bank will have the flexibility to make changes in the amount of OMO and alter frequency and day of auction as may be necessary."
So far in 2009-10, RBI has bought securities worth Rs 29,850 crore through OMO, which involves buying government bonds in the secondary market, against the notified amount of Rs 43,500 crore.
As for the third element of the fund raising exercisethe unwinding of market stabilisation scheme bondsRBI has transferred Rs 28,000 crore through desequestering, while bonds of Rs 37,500 crore have been redeemed. Over the next 10 weeks, MSS redemptions of Rs 4,500 crore are due.
Under MSS operations, RBI had issued securities on behalf of the government and sucked out the excess liquidity. The government bears the interest costs on these bonds.
When these bonds are unwound, the bonds are liquidated and the money is transferred to the Centre's account. The funds which are released would meet a part of the government's borrowing requirements and do away with the need to tap the markets to raise funds.
"The government and the RBI are trying to front-load the borrowing programme to avoid crowding out private investments. This borrowing will be done in a non-disruptive manner.
There is ample liquidity in the system," RBI Deputy Governor Shyamala Gopinath said earlier in the day.
Following her comments, the yield on the most-traded 6.90 per cent paper due in July 2019 dropped six basis points to 6.79 per cent (yield has an inverse relation to price). The borrowing calendar, released in the evening, provided further comfort to the bond dealers and bankers.
"The bond yields are not likely to move up further and remain range-bound," added IDBI Gilts Managing Director G A Todas.
Though the government has proposed to increase its borrowings by 72 per cent during the current financial year, lenders such as Corporation Bank Chairman and Managing Director J M Garg said interest rates were unlikely to move up soon since there was ample liquidity in the system and credit demand was low.
Today banks parked Rs 1,28,000 crore with RBI through the reverse repo window, which is used to absorb surplus liquidity from the system. The flow of bank credit has dropped to 16.34 per cent during the year up to July 3, as against RBI's projection of 18 per cent for the current financial year.