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Govt Confident of Keeping 2021-22 Borrowing Costs Below 6 percent: Sources

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Bond yields surged on Friday following the central bank’s policy meeting amid investor concerns about market liquidity and the government’s 12.06 trillion Indian rupee borrowing programme.

The Indian government is confident that it can obtain funds for its massive 2021/22 borrowing programme at below 6.0%, as the central bank has given assurances that it will provide ample liquidity, two senior officials told Reuters.

Bond yields surged on Friday following the central bank’s policy meeting amid investor concerns about market liquidity and the government’s 12.06 trillion Indian rupee ($165.56 billion) borrowing programme.

While the Reserve Bank of India kept rates at record lows and pledged to provide liquidity to keep markets orderly, investors were disappointed by the lack of clarity about such support with no bond purchase calendar published.

”RBI has assured us that the borrowing for 2021/22, yields will be comfortable and we expect it to not top 5.9% for the fiscal,” one of the two sources said.

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He added that the government’s long-term average borrowing cost is expected to be between 5.8%-5.9% in the fiscal year starting April.

”The RBI has shown that it will not blink as was evident in the auction results,” a second source who asked not to be named as he was not cleared to discuss the matter publicly said.

Amid the wider market ructions on Friday, the central bank sold only 90 billion rupees of bonds versus 310 billion it had set out to sell, with underwriters buying 88.1 billion rupees worth of the paper, after the market demanded higher yields.

”The RBI has done whatever the market has needed and wanted all of last year, so they need to trust the central bank. There is no question of an open market operations (OMO) calendar,” the source added.

The source explained an OMO calendar was not feasible as OMO scheduling was usually dependent on the less certain timing of the RBI’s dollar buying interventions in the foreign exchange market, which release rupee liquidity.

The RBI did not immediately respond to queries while the finance ministry declined to comment.

The sources said since there has been no change in the macroeconomic conditions and with interest rates and liquidity conditions remaining the same, there is no reason for long-term yields to rise.

The central bank on Friday reiterated that its policy stance is expected to remain accommodative for at least the current financial year.

The second source said an RBI decision to allow banks to hold a larger number of bonds in their held-to-maturity category for an additional year to March 2023, protects them from valuation losses while direct access to government bonds for retail investors will also ease pressure on the market.

The sources said the RBI could use open market purchases, long-term repos or other tools to infuse rupees back into the system, after reinstating a higher cash reserve ratio for banks from March. Such infusions will likely be about 3 trillion rupees, they said.

”The markets-RBI face-off could keep yields elevated in the near term,” said Madhavi Arora, economist at Emkay Global. ”However, any premature tightening of the financial condition is unwanted at this juncture.”

($1 = 72.8450 Indian rupees)

(Editing by Simon Cameron-Moore and Sam Holmes)

first published:February 08, 2021, 13:17 IST