Govt completes 90% of gross borrowings

Our Banking Bureau

Mumbai, Nov 27: The central goverment has completed 90 per cent of its gross borrowing programme with the issue of Rs 10,000 crore of dated securities last week and Rs 12,750 crore of 384-day T-bills, ICICI Securities (I-Sec) said in its mark to market report for the week ending December 1.

The central government issued Rs 10,000 crore of dated securities last week, taking the dated issuances in the financial year so far to Rs 95,000 crore.

Earlier in the week, the Reserve Bank of India (RBI) had conducted a price based re-issue of Rs 4,000 crore of government securities (GoI-Secs) 9.85 per cent 2015. The bidding interest amounted to Rs 12,1943 crore and the auction cut-off at Rs 109.83. The RBI also auctioned five-year floating rate bond which witnessed bids totalling Rs 10,315 crore against the notified amount of Rs 2,000 crore.

The spread over the reference rate (average of last six cut-off yields in the 364-day T-bill auctions) cut off at -5 basis points. This implies a coupon rate of 7.01 for the first coupon period.

Last Tuesday, the government placed Rs 4,000 crore of GoI 10.18 per cent 2026 with the RBI at Rs 112.15 (8.95 per cent yield) in order to bring down ways and means average (WMA) below the Rs 6,000 crore limit.

While the short-end of the sovereign yield curve remained almost flat at the previous week’s levels, the long-end crashed by 30-40 basis points during the last week.

The rally took place in two phases. In the first phase, comfortable liquidity and bullish auction result drove yields by 20-25 basis points, before the downgrade of India’s domestic and foreign currency ratings by Fitch prompted a correction.

The second phase of the rally, triggered by positive comments by the RBI Governor, took the long-end yields to fresh historic lows, with the 10-year benchmark yield (11.50 per cent 2011A) plummeting to 8.08 per cent on Friday.

Subsequently, the recommendations of the Standing Committe on the Fiscal Responsibility and Budget Management Bill tempered the market sentiment and caused a pullback in prices by 50-60 paise. The movement of yields in the last week marked a substantial contraction in the spreads of long-end yields over the one-year treasury bill yield.

While the 1Y/10Y spread has moved down from 187 basis points to 151 basis points. The 1Y/20Y spread narrowed to 209 from 244 basis points.

Over the next few weeks, I-Sec believes that the gilts rally may take a breather as borrowings gather pace and market takes stock of the fiscal position of the government. Liquidity is expected to come under pressure after the two auctions likely by the second week of December and the subsequent advance tax outflow.

The downgrade of India’s credit rating and the recommendations of the parliamentary committee have brought fiscal concerns to the fore once again. These concerns and apprehensions of downgrade by other rating agencies will check any large rally at the long-end.
Further, the long-anticipated contraction in long-end spreads is seen as mostly over and gains from current levels are likely to be at most in 10-15 basis points range.

I-sec does not expect any fresh issuances during the week and expects yields to retest their lows as liquidity continues to be comfortable. Though the central bank is expected to offload the privately-placed 25-year stock thorugh OMO sale, this is unlikely to have substantial bearing either on liquidity or on sentiment.