Lower than expected H1 borrowing; GoI to raise INR 2.50trn in H1FY12 : Edelweiss

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Lower than expected H1 borrowing; GoI to raise INR 2.50trn in H1FY12
Gross borrowing of INR 2.50trn; redemption of INR 600bn in H1FY12
 GoI announced a gross borrowing of INR 2.50trn for H1FY12. With redemption of INR 600bn
due in H1FY12, the net borrowing figure for the first half of FY12 will be INR 1.90trn
 The borrowing is likely to be in tranches of INR100bn-INR120bn for the first twenty six weeks
of the H1FY12
 GoI did not announce a new 10 year benchmark and will take a call on the same while
deciding the borrowing calendar. With the 7.80% 2020 bond exhausting its assumed ceiling
limit of INR 600bn; GoI is likely to introduce a new 10 year benchmark by April
 For H1FY11 GoI had set a target to borrow INR 2.87trn out of the total borrowing of INR
4.57trn and eventually ended up borrowing INR 2.80trn
 GoI will end the current financial year with a gross borrowing of INR 4.37trn and a net
borrowing of INR 3.25trn (truncated borrowing in Dec-10 due to excess cash balance
available with GoI)
Lower than expected borrowing in H1; 60% of the budgeted borrowing
 Based on the past borrowing trend; GoI has planned a lower than expected borrowing in H1.
Typically GoI borrows 62%-63% of the total budgeted borrowing in H1 however for H1 FY12
the borrowing is only 60%
 GoI move to borrow more than the usual in the H2FY12 is mainly to control the current strain
on the liquidity. With the weekly supply reducing to INR 100bn – INR 110bn against INR 110bn
– INR 120bn (if GoI borrowed 63% in H1FY12), it is likely to provide some respite to the
liquidity situation and in line with the central bank’s stance to actively manage the liquidity
 GoI currently holds a comfortable cash balance of INR 900bn and is likely to draw down this
balance during the first half of FY12
 Lower borrowing in the first half may also be a signal for the government’s confidence that
there will be no slippage on the fiscal side. With under provisioning of subsidies in the Union
Budget FY12, this move is likely to provide a boost to the sentiment in the bond market
Net borrowing higher by 22% in H2FY12; pressure on private sector off take
 Although gross borrowing for H2FY12 will increase only by 6% YoY, a net borrowing of INR
1.53trn in H2FY12 is 22% higher than H2FY11 mainly on account of lower redemption in the
second half the next financial year
 Higher net borrowing in H2 is likely to put pressure on interest rates once the demand for
the private sector picks up (slippage due to higher subsidy bill during the second half is going
to be another crucial factor to decide the direction of the yield)