Analysis: Govt's borrowing agenda won't affect mkts

Below is a verbatim transcript of Latha Venkatesh's analysis of the government's borrowing programme on CNBC-TV18. Also watch the accompanying video.
If one goes through the arithmetic, one would know that there is really nothing surprising about the number that was announced. The government said that Rs 1,23,000 crore will be borrowed from now i.e. from October 1 up until the end of the financial year. It is not surprising because the total borrowing programme was Rs 4,50,000 crore according to the budget. Of that Rs 2,96,000 crore has already been borrowed as of even date i.e. in the first half of this year. About Rs 27,000 crore was shifted from the market stabilisation scheme (MSS) kitty to the fisc in the first half - another Rs 5,000 crore will be shifted in the second half from the MSS kitty to the fisc and the balance is Rs 1,23,000 crore, so no guesses over there or no surprises, which is why the market was unmoved by that number.  

Even the manner in which it is sequenced is not very surprising - Rs 10,000 crore will be borrowed very week with one-week in a month going without any borrowing. So, probably, the state loans will be borrowed at that time. None of this is surprising but the market sold off. Now that's the big issue. 

Why did the markets sell off?

That's really because of statements coming from the RBI Deputy Governor Shyamala Gopinath on this old issue of the HTM hike or the held-to-maturity cap. The government bonds which the banks own are put in a kitty called the held-to-maturity category. The maximum that they can put in the held-to-maturity category is 25% of their total deposits.   

Banks of course are saying that the more we buy government bonds with bond prices now falling, it is disadvantageous to buy and therefore the HTM cap should be raised. The RBI has been on record to say that we are considering. It doesn't say yes or no. Today, once again after this marathon meeting with the finance ministry officials, everybody was expecting that perhaps a decision would come, and the Deputy Governor says we are still considering. That has disappointed the market.  

One doesn't know what the thinking in the RBI is. It could be that the RBI itself is a divided house on this. This could be a huge contention between Finance Ministry and RBI with the RBI not wanting to allow a rise in the HTM because that could be pro-corporate governance on the part of the central bank or it could be that the RBI is holding that as a weapon. In the future maybe if inflation rose or the dollar depreciated a lot and the RBI had to issue MSS bonds. Whatever the reason, the RBI was not giving any indication of whether it will hike the HTM and that is why bonds sold off.  

Chances are that on Thursday morning the markets will not react to the borrowing calendar at all and will react to new data, like for instance tomorrow's CPI inflation number of the wholesale price index number on Thursday. There is no trading on Wednesday on account of half-yearly closing.