Government's borrowing plans
The government released its borrowing calendar for the first half of 2018-19. The Government plans to borrow Rs 2.88 trillion between April-September in FY19 compared to Rs 3.72 trillion in the same period of FY18. This constitutes around 47% of the gross borrowing of Rs 6.05 trillion for the year 2018-19 compared to usual 60-65% of first half borrowings. The government also reduced the total borrowing amount by Rs. 250 billion which they plan to raise through small saving schemes. It also reduced the buyback of government securities by Rs. 250 billion which will lower the gross borrowing for the year. So the total gross borrowing for FY19 will be lower by Rs. 500 billion. Apart from this government also tweaked the maturity profile of the new government borrowings as it intends to borrowing higher proportion through shorter dated securities.
Bond market opened on cautious note owing to rising crude oil prices and lower appetite for bonds in the truncated week. The auction to sell State Development Loans witnessed a tepid demand and resulted in additional selling pressure in government securities. The 10 year benchmark bond yield rose to 7.62% after the auction cut-off. But lower than expected supply of government debt in the first half of fiscal FY19 along with a cut in total borrowing enthused the bond bulls. The bond yields witnessed a sharp rally of 15-30 bps on the announcement. The 10-15 year segment of the yield curve was the best performer as the government plans to sell lower than usual proportion of bonds in this maturity bucket. After the sharp rally, the market witnessed some profit booking towards the long week end. The 10 year benchmark bond closed the week at the yield of 7.40% as compared to the previous week's close of 7.56%.
Liquidity with commercial banks remained tight at a deficit of INR 600 billion as of 31 st March 2018. This was primarily on account of high tax outflows ahead of fiscal year end. We expect liquidity situation to ease and turn into surplus in the coming weeks as government spends its high cash balances. Short-term money market rates fell by 40-60 basis points during the week within 2 months, certificate of deposits fell to 6.4% against above 7% mark for the entire month. We expect short term rates to fall further as liquidity condition eases.