RBI doubles bond purchases in june to stabilise yields

MUMBAI: Purchase of government bonds by RBI - the government's debt manager - doubled in the last week of June, signalling it won't hesitate to intervene in stabilising yields when the government borrowing for the fiscal year is forecast to surpass the budget target. The central bank bought government bonds worth Rs 1,143 crore in the secondary market, almost double of what it bought in the first two months of this fiscal, RBI data shows.  "The concern now is on risk of overshoot in budgeted fiscal deficit of 4.6% of the GDP," says Moses Harding, head of global markets, IndusInd bank. "The poor economic performance will put pressure on revenue collections and disinvestment plans may not go as per schedule. It seems that the government is worried on locking into higher coupon rate in the longer-tenor segment and the belief is that 10-year bonds above 8.25% are beyond their tolerance level," he said. Yields on the benchmark 10-year government bonds have remained above 8.3% since June as investors believe that the central bank may raise policy rates by at least another 50 basis points this year. Also, the rising subsidy bill of the government and slowing of revenue collections could force the government to borrow more than the budgeted Rs 4.17 lakh crore. Finance minister Pranab Mukherjee said on Tuesday the government would stick to its targeted borrowing programme and fiscal deficit aim of 4.6% despite rising subsidies. The reduction in customs duties to zero from 5% for crude oil, and to 2.5% from 7.5% for petroleum products, is expected to cost the exchequer Rs 49,000 crore. The government target of raising Rs 40,000 crore from sale of stakes in state-run companies may also fail for the second year if equity markets remain choppy. "I think the government and RBI are concerned about the unrelentingly high g-sec yields, which they would like to see at 8.10-8.20% levels," said the head of a bank treasury. "Whether or not the government overshoots its borrowing programme, yields have to come down to reduce its cost of borrowing. Even an increase of 20-30 basis points in yields would impact borrowing costs."  Even the RBI has been worried about the government's fiscal profligacy. "It would be very difficult to attain the fiscal deficit target unless there is adjustment on expenditure, or tax," Governor D Subbarao had said in a press conference on May 19. RBI would raise aboutRs 63,000 crore through g-sec auctions in July.

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