India to Boost Record Borrowing by 8.5% as Slowing Growth Cuts Tax Revenue

By Jeanette Rodrigues - Dec 30, 2011 7:05 PM GMT+0530

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India increased its record borrowing program for the year by 8.5 percent to narrow a budget shortfall as a slowing economy damps tax collections.

Prime Minister Manmohan Singh’s government will sell an additional 400 billion rupees ($7.5 billion) of bonds in the year ending March 31 raising an unprecedented total of 5.1 trillion rupees, the central bank said in a statement today.

Indian 10-year benchmark bond yields (GIND10YR) have jumped the most in Asia after Vietnam, as the government sold more debt to meet its target of keeping the budget gap to 4.6 percent of gross domestic product. The rate on the 8.79 percent note due November 2021 climbed two basis points today and 20 this week to 8.57 percent, according to the central bank’s trading system.

“The market is already burdened by supplies,” Debendra Kumar Dash, a fixed-income trader at Development Credit Bank Ltd. (DEVB) in Mumbai. “However this increase was expected, and so while we could see yields rising in early trades on Monday, they will settle down soon.”

The 10-year bond yield could rise as high as 8.70 percent, according to Development Credit Bank and IDBI Bank Ltd. (IDBI) following the increase in the bond-sale plan.

The Reserve Bank of India (RBI) has said the government must rein in borrowings to help check price gains and boost economic growth. The $1.7 trillion economy may miss the central bank’s growth estimate of 7.6 percent for the 12 months ending March 31, Governor Duvvuri Subbarao said Dec. 22.

The government increased its borrowing plan by 528.7 billion rupees in September.
Wider Spread

The nation’s indirect tax revenue rose 16.9 percent in the eight months through November from a year earlier, S.K. Goel, chairman of the Central Board of Excise and Customs, said Dec. 9. That compares with a target for a 17.3 percent increase this fiscal year.

The extra yield (GIND10YR) sought on the notes over similar maturity U.S. Treasuries surged 205 basis points in 2011 to 667 basis points. The spread reached a 12-year high of 697 basis points in November.

Rupee-denominated notes returned 5.9 percent this year compared with the region’s best performance of 22 percent for Indonesian securities, HSBC Holdings Plc indexes show. Overseas investors raised holdings (FIINDEBT) of Indian debt by $8.5 billion this year to a record $26.3 billion on Dec. 23, exchange data show.

“Government borrowing is pressuring the yields upward,” said Roy Paul, deputy general manager of treasury at Federal Bank Ltd. (FB) in Mumbai. “But the slowing economy will force an interest-rate cut next year and so yields should move downward in 2012.”

To contact the reporter on this story: Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net
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