Of its planned 14.01 trillion rupees ($167.61 billion) in gross borrowing for the April-March financial year, the government has about 6.61 trillion rupees left for the remaining six months.
While some market participants expect a cut to the leftover amount, the majority expect the government will stick to its budgeted borrowing.
The “market has not given up hope of a cut in the borrowing program, (but it) may be in December or January. A cut in borrowing is much more positive for the longer-end (bonds),” said A Prasanna, head of research at ICICI Securities Primary Dealership.
Market participants are keen to see the government’s appetite for shorter-tenor treasury bills, especially after it, in an unprecedented move, canceled two such auctions earlier this month.
But, the overwhelming demand is for more longer-dated paper, especially as yields have dropped drastically, pulling the government’s borrowing costs for such paper to a near three-year low. Nearly 40% of the government’s borrowing from April to September was via longer-end papers. Demand from Indian insurance companies and pensions funds pulled the yield on 50-year bonds under 7% for the first time ever earlier this month, while the 30-year bond yield has declined 50 basis points so far this year.
Insurers and pension funds invest a majority of their corpus into long-term government bonds to ensure adequate cash flow down the line as payouts come due, leading to unrelenting demand for such papers.
“We are present at every auction with demand of 10-15 billion rupees and, irrespective of the yields, we have to buy long papers for our product mix,” a trader with a large pension fund said.
The trader and the two sources mentioned above declined to be named as they are not authorised to speak to the media.