The central bank will advise the government to continue relying on short-tenor bonds to ensure success of its borrowing in the rest of this fiscal year, bank treasurers said.
Investors would prefer short-term bonds because liquidity conditions will be tight and appetite for riskier assets may rise, sapping demand for government issues.
So, the scope for RBI to manoeuvre long-term yields with issue of longer tenors is narrow, bank treasurers said. It will have to rely on shorter-tenor bonds to pull the yield curve down, they said.
RBI and finance ministry officials will meet later this month to schedule government?s market borrowings in the second half of this fiscal year.
September policy
The government?s borrowing programme will be one of the factors RBI officials will consider while framing the mid-quarter policy, to be announced next week.
Gross borrowing for this fiscal year is slightly larger than last year?s, which was the highest ever.
As government?s debt manager, RBI will be keen to ensure smooth passage of the borrowing and at the lowest cost possible.
As the monetary authority, it might be considering policy rate increases to stem inflationary pressures coming from surging growth.
Maturity profile
RBI?s policy is to elongate the maturity profile of the government issuances. However, the last two years forced a digression from that policy because a big borrowing programme had to be completed for financing stimulus packages to combat global economic slowdown.
In the six months to September, or the first half of 2010-11 (April-March), the government plans to borrow Rs 2.87 trillion, or 63% of the full year?s budgeted gross borrowing of Rs 4.57 trillion.
Of the Rs 2.62 trillion borrowed so far, Rs 1.58 trillion or 60% was via issuances up to 10 years? maturity. And excluding loans in the nine-to-ten-year bucket, the issuances so far were Rs 990 billion, or 38%.
The weighted average maturity of the issues in April-June was 10.45 years, down from 11.86 years in the same period a year ago.
?The weighted average maturity (of gilts) was reduced to ensure success of government?s market borrowing programme,? said a finance ministry report issued earlier this month.
The lower maturity profile also helped the government control rising borrowing costs: the weighted average yield was 7.61% in April-June compared with 6.93% a year ago and 7.23% in the whole of the previous fiscal year.
In the first quarter, weighted average coupon of the outstanding stock of government loans was lowered to 7.85% from 8.09% a year ago and 7.89% in 2009-10.
Demand from traditional buyers of long tenors ? insurance companies and pension funds ? is expected to be low because better yielding alternative investments will be available. These could be shares in government companies and loans to infrastructure projects.
