Bloomberg News

India to Borrow 32% More Than Planned in Second Half; Bonds Drop

September 29, 2011

Sept. 29 (Bloomberg) -- India’s federal government increased its debt-sale target for the second half of the financial year by about 32 percent, citing a drop in state-run small savings plans. Ten-year bonds slumped.

The finance ministry plans to raise 2.2 trillion rupees ($45 billion) selling bonds in the six months ending March 31, higher than the budgeted 1.67 trillion rupees, R. Gopalan, secretary, Department of Economic Affairs, told reporters in New Delhi today. The government raised 2.5 trillion rupees in the first six months of the year.

“This has come as a negative surprise,” said Nirav Dalal, the Mumbai-based head of debt markets at Yes Bank Ltd. “Considering the heightened fiscal conditions globally, there was a sense that the government would maintain their numbers.”

The yield on the benchmark 7.8 percent note due April 2021 jumped 10 basis points to 8.44 percent after the announcement, according to the central bank’s trading system. The rupee fell 0.5 percent to 48.97 a dollar at the 5 p.m. close of trading.

The government expects a shortfall of 350 billion rupees because of fewer collections in small-savings accounts, and dwindling cash reserves, Gopalan said. The surplus at the beginning of the year was 170 billion rupees less than expected, and a dip in the available sources of funds prompted the government to lift market borrowings, he said.

Taming Inflation

The nation’s benchmark bond yield has risen about 50 basis points, or half a percentage point, this year as the Reserve Bank of India increased borrowing costs six times to tame inflation that remained above 9 percent for nine consecutive months. It has also surged the most among the 14 economies in Asia this year, partly on concern slower economic growth and higher oil prices may cause slippages in tax collections and boost fuel subsidies.

The government predicts the economy will expand 8 percent this financial year, slower than the 8.5 percent in the previous 12 months.

Finance Minister Pranab Mukherjee will still meet his goal of narrowing the budget deficit to a four-year low of 4.6 percent of the gross domestic product, Gopalan said. Mukherjee is aiming to increase the tax revenue by 18.5 percent to 9.32 trillion rupees this year, even as a 19 percent slide in the benchmark Sensitive Index of shares in 2011 forces him to delay sale of assets.

“There’s a serious threat to the government’s deficit target on expected higher spending on subsidies and lower revenue from disinvestment,” said Indranil Pan, chief economist at Kotak Mahindra Bank Ltd. in Mumbai. Bond yields may touch 8.7 percent in the year and the budget shortfall may widen to as much as 5.4 percent of GDP, he predicted.

India has raised just 3 percent of a targeted 400 billion rupees from selling stakes in state-run companies, with plans for Oil & Natural Gas Corp., Steel Authority of India Ltd. and Hindustan Copper Ltd. stalling.

The central bank on July 26 said that the government needs to focus on the quality of its expenditure to gain control over inflation. “Fiscal consolidation is, therefore, critical to managing inflation,” it said.

--With assistance from Jeanette Rodrigues in Mumbai and Unni Krishnan in New Delhi. Editors: Sam Nagarajan, Arijit Ghosh

To contact the reporter on this story: Kartik Goyal in New Delhi at; Tushar Dhara in New Delhi at

To contact the editor responsible for this story: Stephanie Phang at

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