Bond yields will depend on Rs 50k-cr stretch: JPMorgan

Brijen Puri of JPMorgan is waiting to see what the government will do with the Rs 50,000 crore of stretch that it was planning. Initially the government had pegged gross borrowing for FY14 at Rs 5.79 lakh crore. But now the amount is expected go up to Rs 6.29 lakh crore. He says as of now some of that is already priced into bond yields with the assumption that it will be the quasi-slippage in the borrowing programme. This is where he will be looking for cues going forward as far as bond yields are concerned.

Also Read: Why yields on 10-year govt bonds have hardened so fast?

Though bond buying is expected to be more or less in line, says Jayesh Mehta, Bank of America. He expects net borrowing of maybe Rs 2.35 lakh crore for the rest of the year and on the overshoot maybe Rs 2.85 lakh crore.

The FY14 borrowing programme is pegged at Rs 6.29 lakh crore – H1FY14 borrowing is already completed at Rs 3.44 lakh crore, hence as per traders anything above Rs 2.85 lakh crore (Rs 3.44 + 2.85 = Rs 6.29 lakh crore) will be a negative and anything below the Rs 2.85 lakh crore figure will be assumed to be a positive.

Below is the verbatim transcript of Jayesh Mehta and Brijen Puri's interview on CNBC-TV18

Q: How much of this panic is at all to be attributed to the borrowing programme? There cannot be any surprises there, isn't it today. What are you expecting?

Mehta: I think that should be more or less on the line. If it is more or less on line, net borrowing of maybe Rs 2.35 lakh crore for the rest of the year and on the overshoot maybe Rs 2.85 lakh crore could be the situation. I think the panic is not because of the borrowing programme.

It is two things which have really raised concerns. First, repo rate hike and therefore it becomes inflation targeting and then today some bank has also come out with looking at repo rate being 8.5 percent by year end. So that has really raised concerns. Second, of course on the Open Market Operations (OMO). You have huge supply every week and if you do not have OMOs and the call money being at 9.5 percent it is very difficult. So we are somewhere back to the situation of  August where we had crisis for two days. If we do not have an OMO maybe the crisis could be more similar to what we had in August.

Q: What is your expectation of the figure for the second half borrowing programme? Do you think that the yields have factored it in today?

Puri: As just mentioned total amount of Rs 6.29 crore odd of government borrowing is what we are looking for. What does the government do with the Rs 50,000 crore of stretch that it was planning to do. As of now some of that is priced into the bond yields with the assumption that it will be the quasi-slippage in the borrowing programme. I think that is where we will look for cues going forward as to what happens to the bond yields.

Q: So you are expecting that today's borrowing programme will be Rs 50,000 crore more than that Rs 2.35 lakh crore that Jayesh mentioned? Therefore you will be confronted with a Rs 2.85 lakh figure?

Puri: Yes, that is the fear in the market.

Q: Since concomitantly later on the government will borrow less, won't that be seen as a mollifying factor at all?

Puri: For the moment the market will have to deal with the weekly supply and that is something which is scary. Also what we need to look at is the fiscal numbers. Up until the latest numbers that we had till July they were fairly bad. We are at 61 percent against the last few years average of much lower closer to 50 percent. That is the fear. As also the fact that diesel prices which people were hoping will be raised immediately post the monsoon session, we are still waiting for that to happen and with the diesel under-recoveries close to Rs 13-15, we are really worried as to how the government will reach the 4.8 percent that it is looking to close at.

Q: So you are afraid they will borrow more? Do you expect a larger borrowing number even after accounting for that switching?

Puri: I do not think they will announce a larger borrowing programme. It is just that the Rs 50,000 crore of switch will be included in the numbers that they announce today itself and the switch itself we are not very sure as to whether that would happen or will that just turn out to be an additional borrowing.