Govt's plans may put further pressure on supply of funds

Priya Nair

Revised estimates

Gross borrowing

for 2005-06 is Rs 1,01,000 crore.

Already borrowed

Rs 85,000 crore.

Likely auction

of Rs 15,000 crore.

Mumbai, March 5

The domestic bond market appears to be jittery post Union Budget, with the Finance Minister having indicated that the Government might borrow an additional Rs 15,000 crore.

This unscheduled auction in the last month of this fiscal is expected to put further pressure on the supply of funds that is already tight, said dealers.

As per the Finance Minister's speech, the net budgeted borrowing has gone up for 2006-07. For 2006-07, the Government has targeted a net borrowing of Rs 1,14,000 crore against a target of Rs 1,03,750 crore in 2005-06.

As per the revised estimates, the gross borrowing for 2005-06 is Rs 1,01,000 crore. Of this, the Government has borrowed around Rs 85,000 crore so far.

This indicates that there could be an auction of Rs 15,000 crore, said a dealer with a private bank.

Unscheduled auction

"This would be an unscheduled auction. But it needs to be seen if the Government will be able to borrow the entire amount.

"I feel they may be able to borrow only up to Rs 8,000 crore or so, as there is no appetite for the auction," he said.

As per the auction calendar, two auctions were scheduled to be held in February.

In case of one, the amount was reduced from Rs 9,000 crore to Rs 6,000 crore.

The other auction of Rs 5,000 crore was cancelled due to the tightness in liquidity.

"We have yet to see what coupon the Government will fix on the auction. But the market is flat and there is no appetite to absorb this auction.

"Most primary dealers have offloaded their positions to insurance companies, at substantial loss, in anticipation that they may be forced to buy Government papers in the auction," said Mr Deepak Sood, Assistant Vice-President, Money Markets, UTI Bank.

Due to concerns of supply and higher budgetary borrowing, the bond market is likely to be flat next week.

March may be dull

The advance tax outflow of about Rs 25,000 crore from the system will also add to the liquidity crunch. Therefore, March is likely to be a dull month for the bond market.

According to a primary dealer, if the auction is announced, the yield on the benchmark 10-year paper could increase by another 10 basis points. "Buying interest is very less. PDs are not interested in taking fresh positions," said the dealer.

The Economic Survey 2005-06 has observed the tightening of liquidity in the system.

It said, with inflationary concerns and emerging tightening of liquidity in the system, the yield on the benchmark 10-year G-sec had touched 7.30 per cent in early February.

Even the Finance Minister had asked the RBI to ensure ample liquidity to the productive sectors so as not to apply the brakes on the growth story.

And in response, the members of the RBI board had assured that ample liquidity would be provided, especially in the manufacturing and service sectors.

Related Stories:
Bonds lower on fears of higher borrowings
Bond prices fall
Prices flat in bond market

(This article was published in the Business Line print edition dated March 6, 2006)
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