The government is confident that it will stick to its net budgeted borrowing of Rs 479,000 crores for fiscal 2012-13 despite taking approval for extra spending of around Rs 32,000 crores. The parliament gave the government an approval to spend Rs 30,840 crores towards fuel subsidy and other items. The Finance Minister indicated that the government is not likely to overshoot its budgeted borrowing despite fiscal deficit being pegged at 5.3% of GDP, higher than budgeted estimates of 5.1% of GDP.
The bond markets were expecting an additional borrowing of around Rs 20,000 crores with the likelihood of the extra borrowing going up to Rs 50,000 crores. The fact that the government is indicating no extra borrowing will boost market sentiments in the coming weeks. The government may still borrow extra but in the current environment of RBI bond purchases and rate cut expectations, markets will take the Finance Ministers words of no extra borrowing positively. Government bond yields will come off from current levels of 8.16% on the benchmark ten year bond the 8.15% 2022 bond.
RBI held a bond purchase auction for Rs 12,000 crores last week where it accepted bids for Rs 11,640 crores. RBI has announced a bond purchase auction for Rs 12,000 crores this week. RBI bond purchases is helping infuse liquidity into the system and helping the market absorb the supply of bonds from the government. The fact that RBI is buying bonds from the market through OMO’s (Open Market Operation) coupled with the government indicating that there will be no extra borrowing is highly positive for the bond markets.
The RBI Governor indicated that inflation is likely to come off in the January-March 2013 quarter. RBI has sounded out that rate cuts are probable in January 2013 though there could be a surprise cut in its 18th December mid term policy review.
Liquidity as measured by the bids for repo in the LAF (Liquidity Adjustment Facility) auction of the RBI eased last week on the back of RBI bond purchases. Bids for repo averaged Rs 93,000 crores on a daily basis last week against an average of Rs 102,000 crores seen in the week previous to last. Liquidity is likely to ease further on the back of RBI bond purchase auctions.Corporate bond yields came off by around 2bps week on week on the back of OMO announcement. Five and ten year benchmark AAA corporate bond yields closed last week at levels of 8.98% each. Corporate bond yields are likely to trend down on the back of improving liquidity conditions.
OIS (Overnight Index Swaps) market saw the curve shift down on the back of RBI bond purchases. One and five year OIS yields fell by 7bps and 4bps week on week respectively. One year OIS yields are likely to fall faster than five year OIS yields as markets expect liquidity to ease on the back of OMO’s.
Governmentbondauction
The government auctioned Rs 12,000 crores of bonds last week. The bonds auctioned were a new eight year bond for Rs 4000 crores, the 8.20% 2025 bond for Rs 6000 crores and the 8.83% 2041 bond for Rs 2000 crores. The cut offs came in at 8.12%, 8.23% and 8.40% levels respectively.