India’s 10-year bonds fell on Tuesday, pushing yields to their highest in more than two weeks, after the Reserve Bank of India (RBI) Governor Duvvuri Subbarao said that government borrowing in the next fiscal year may exceed this year’s record level.
The yield on the 6.35% note due January 2020 rose two basis points to 7.65% today, according to the central bank’s trading system. The price fell 15 paise, per Rs100 face value to Rs91.07. Some analysts say the yield could move closer to 8% by March.
The Government will sell Rs80bn of debt at an auction on Feb. 5, the last of its planned Rs4.51 trillion of debt sales for the current fiscal year.
In a conference call on Monday with analysts, Subbarao said that his assessment of higher borrowing is based on indications from Finance Minister Pranab Mukherjee that the budget deficit will be 5.5% of GDP in the fiscal year ending March 2011.
The fiscal deficit in FY10 is forecast at 6.8% of GDP, the most in 16 years.
The RBI chairman said yesterday that managing the governments borrowing programme will be challenging given the anticipated pick-up in private credit, higher inflation and limited room to maneuver on the liquidity front.
The RBI Governor said there could be pressure on yields if next year's borrowing turns out to be higher than expectations.
A central bank deputy governor said that the RBI would only adjust monetary policy outside of its quarterly review cycle under extraordinary circumstances, meaning its next move was likely to occur only in its annual policy review in April.
At its monetary policy review last Friday, the central bank lifted the cash reserve ratio (CRR) - the amount of funds banks must hold at the central bank - by a higher-than-expected 75 basis points to 5.75% and held key interest rates steady.
Separately, the RBI Governor said yesterday that India may have to take some measures towards capital control in the short term to avoid adverse consequences on the economy in terms of the potential fallout on inflation and asset prices.
"All emerging market economies now believe that capital inflows will increase in the months ahead," Subbarao said in a teleconference, which was the first such event in the RBI’s history. "If that happens based on India’s growth prospects, it is possible that the inflows will be much beyond our current account deficit."
"In the medium-term, it is our objective that India expand its absorptive capacity to absorb the capital flows, but in the short-term should there be flows largely in excess of our current account deficit .... we may have to take some measures towards capital control," the RBI chairman said.
FII inflows into Indian stocks surged to US$17bn last year. This led to a 10% rise in the Indian Rupee since end-March 2009.
"Sharp increase in capital inflows, above the absorptive capacity of the Indian economy, may complicate exchange rate and monetary management," the RBI had said in its monetary policy review on January 29.
Listen to the audio transcript of RBI's Concall with analysts: