H1FY13-Govt. Borrowing Calendar: Negative on yields :MSFL

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The Reserve Bank of India unveiled GoI borrowing program for the first half of FY2013. The cumulative borrowing for H1-FY13 at ` 3.7trln comprises 65% of the total Budget estimate of Gross borrowing for FY13. The borrowing would be on an average of ` 150bln to ` 180bln per week with 72% of the borrowing coming from longer term maturity (>10yrs). The front-loading is a normal phenomenon; nonetheless the proportion is much higher given a historic average of 56%. The market off-late has been skeptical of the ability of Government meeting the fiscal targets and hence weary of absorbing such higher quantum of borrowings without support from the central bank. The borrowing program During H1FY13, RBI plans to borrow ` 3700bln, forming about 65% of the budgeted gross borrowings for FY2013. Breaking down further, the central bank plans to issue securities worth ` 1880bln during Q1FY13, while remaining ` 1820bln will be raised during Q2FY2013. Every week would see auctions of ` 1500bln-` 1800bln, apart from the weeks of advance tax-flow. For the fiscal, (FY13) the total issuance is pegged at ` 5.7trillion, which corresponds with the government's fiscal deficit target of 5.1% of gross domestic product (GDP). From maturity perspective, the bond issuance is heavily tilted towards longer maturities (~72% of total issuance with 10yrs+ tenure).
OMOs essential for comfortable absorption Q4FY12 saw a ` 1570bln of borrowing which went through, in the midst of high yield scenario and declining market absorption capacity. However, such high yields too, where somewhat contained by the constant OMOs conducted, which resulted in Govt. debt monetization in the name of management of liquidity

In the H1-FY13, too we foresee the similar environment panning out i.e. Liquidity should continue to be in the deficit mode, reserve money growth and hence the money growth should lag the targets (as they did in H2FY12) and hence OMOs would be justifiable and necessary tool to enhance the absorption capacity (incremental SLR investments for SCBs stand at 41% for FY12 vis-à-vis 17% for FY11) of the market. As seen in the Exhibit of redemption calendar, Apr’12 and May’12 see 58% of the total redemptions hence the net borrowings are 390bln and 300bln respectively. Post which the net borrowing almost doubles in the subsequent months and hence in the latter part of Q1FY13 or in Q2FY13 there exists a high likelihood of witnessing OMO by the RBI. Outlook The current environment is such that the market cannot suck-up such high quantum of weakly supplies (` 100bln/week during Q4FY11 and ` 150bln/week for H1FY13). This was pretty evident from the fact that 10yr-yield touched a high of 9% in Nov’11 and 6% of the G-Sec auctions devolved during the analogous period. Thereon, raising the investment limit for FII in G-sec and ` 1900bln of OMO conducted by the RBI, provided the much needed breather. Keeping this scenario in the hindsight, we believe H1-FY12 borrowings of ` 150bln on a weekly basis is hard to absorb without negative impact on yields. Hence the borrowing programme poses a negative risk to the yields, where in the amount of negative movement in rates is pegged to the event and quantum of OMOs