Govt's borrowing plans hit Re, bonds

Both foreign exchange and government bond markets ended flat on Tuesday. While bonds were subdued after the government said it would borrow more than planned this week, the rupee ended lower against the dollar, which had recovered against major currencies after several days of weakness, reports Our Bureau in Mumbai.

The Reserve Bank of India on Tuesday announced a Rs 6,000-crore bond buyback. The announcement came a day after the government hiked this week���s borrowing plan to Rs 15,000 crore from Rs 12,000 crore. The three instruments that will be bought back are those expiring in 2017, 2022 and 2032, respectively.

Dealers say the fatigue is slowly setting in among bond traders over the government's oversized borrowing programme. Some even expect that the Centre will end up overshooting its expenditure targets.

Traders say RBI could have designed the programme much better. They add rather than selling "on the run" bonds that the market likes to trade, RBI has been only issuing newer and illiquid bonds. Ashish Vaidya, head of interest trading at HDFC Bank, is one of them. He said bonds, which RBI has been auctioning, of late, have been only confusing traders and sending the yield curve awry.

Friday's auction includes Rs 8,000 crore of a new six-year bond, Rs 5,000 crore of an 8.2% bond due in 2022, and Rs 2,000 crore of a 7.5% bond due in 2034.

"The market would have liked if RBI was systematically auctioning benchmark papers of popular tenure (say 5-year, 10-year, 15-year etc.), as this gives more certainty and confidence to the trader," Mr Vaidya said. ���The current programme hardly ensures a liquid and transparent price-discovery mechanism," he added.

Interest in the 10-year benchmark paper has been diminishing in the recent days. On Tuesday, it was only the sixth commonly-traded paper in the market.

The 10-year bond ended at 6.65%, while the rupee closed at 47.01 against the dollar. The currency lost seven paisa on lack of direction from the stock market and due to broad strength in the dollar overseas.

The rupee's marginal fall came on a day when the dollar rose after hitting its lowest this year versus a basket of currencies the previous day. Dealers say in the context of expectations of recovery in the global economy, the underlying sentiment for the US currency remained bearish.