Govt borrowing to be helped by short-term bond issues

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The Reserve Bank of India (RBI), tasked with managing record government borrowing, could resort to more short-term and floating rate bonds in the new fiscal year, while it raises interest rates to tame inflation.

Gross government borrowing will rise by 1.3% to Rs 4.57 trillion (USD 100 billion) in the fiscal year that starts on April 1. While a resurgent economy makes that debt easier to sell, worries about fiscal discipline continue to weigh on bonds.

The median estimate in a Reuters poll of 10 analysts showed the RBI could borrow Rs 3.1 trillion, or 68% of its gross full-year requirement, between April and September.

Kotak Mahindra Bank expects about 600 billion to Rs 700 billion of the first half issuance in the 2 to 5-year segment.

However, JPMorgan Chase expects it to be just Rs 90 billion and predicts the issuance pattern to be similar to that of the this fiscal year, where the programme was dominated by issues with a maturity between 5 years and 10 years.

"Floating rate bond issuance will surely help in assuaging the concerns of a bond trader when he looks at the total amount of fixed rate bonds in the market," said B. Prasanna, chief executive officer of ICICI Securities Primary Dealership.

Investors prefer floating rate bonds of up to 10 years and fixed rate bonds of up to 5-year maturities, he said.

The average maturity of outstanding floating rate bonds is 7 years.

First-half focus

The RBI and the government are due to meet this month to decide the borrowing plan for the next fiscal year, followed by the bond auction calendar release for April-September.

"We do have to look at issues like scheduling, distribution, yield curve, range of tenors to make sure we don't get too much pressure at some point in the yield curve as sort of tactical tools to help us manage the demand," RBI Deputy Governor Subir

Gokarn said last week.

Whatever the RBI does, its room for manoeuvre is limited by its hawkish stance. Investors expect 10-year yields to rise further after they hit a 17-month high of 8.02% on Monday.

Deepali Bhargava, economist at ING Vysya Bank, expects the RBI to raise both the repo and reverse repo rates by 125 basis points each in the next fiscal year.

"The 10-year bond yield could peak at 8.50%, most likely in the first half of 2010/11, because the borrowing calendar would be front-loaded," she said.

Last year, the government completed nearly two-thirds of its borrowing in the first half of the fiscal year, and market players expect a similar pattern in the new year.