Govt to borrow Rs 1.1 lakh crore by September end

CNBC-TV18's Abhijit Neogy analyses.

As per the figures announced by Shyamala Gopinath, the Deputy Governor of the RBI, it is understood that Rs 1.1 lakh crore of additional gross borrowing will happen till September 30. The H1 target was Rs 2.41 lakh crore. The programmed borrowing so far is about Rs 1.89 lakh crore. So, Rs 1.1 lakh crore takes that figure up to Rs 2.99 lakh crore. The net additional borrowing then would be to the tune of Rs 58,000 crore.

Sources in the finance ministry say the average weekly borrowing initially could be around Rs 12,000 crore. They will taper that down to about Rs 11,000 crore, Rs 8,000 crore, 7,000 crore on an average basis till we hit September 30.

The other important issue is the open market operations (OMOs). A considerable chunk of these borrowings would be through the OMO route and there will be 10 tranches of auctions leading up to September 30.

Here's CNBC-TV18's Latha Venkatesh on how the development would impact bonds markets.

After the announcement, the bond prices rose and yields fell and market heaved a sigh of relief. The market was already prepared for a bigger government borrowing programme because of the budget. The day the fiscal deficit was announced the borrowing programme shot-up from Rs 3.6 lakh crore to Rs 4.5 lakh crore in the Interim Budget. Already, the bond yields went up by 0.25 percentage point and bond prices crashed.

Thereafter, the market came to terms with the fact that of that extra borrowing much of it had already been done because the government was borrowing more than scheduled in the first three months, that is, March and April, May and June. Second, there is a bit of MSS money lying in the kitty and that will be brought down. The market was already improving and that worsened yesterday when the Finance Ministry official said that every week the government will borrow Rs 15,000 crore.  

Bond prices crashed post the news. However, the new programme announced that only Rs 11,000 crore will be borrowed every week. Subsequently, the market actually heaved a sigh of relief and today bond prices are actually at the same level as they were pre-budget. So that is the extent of relief from the borrowing programme. There is enough of surplus cash in the system now and the market was afraid that the government will borrow much more than just that Rs 2.90 lakh crore. They were scared that much more than that will be appropriated by the government.

Since that is not the case, the market is at the moment in a sense of relief but one should not expect that this bond rally can continue for too long. For one thing, in the month of June, private credit, that is loans by private sector companies from banks has shot up considerably. In the first two months of the current year--April and May--the total credit taken by the private sector contracted compared to the month ago terms and compared to year ago terms. However, there was recovery in June and if this continues then there is genuine competition for cash. Therefore, it looks like bond prices will peak out at current levels and interest rates may rise.