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Bond market comes under pressure

business Updated: Jul 07, 2009 21:45 IST

Yields on government bonds remained firm on Tuesday on concerns that this year’s record government borrowing would crowd out (make less money available for) the private sector. The yield on the government bond maturing in 2014 rose to 6.53 per cent on Tuesday before closing flat at Monday’s level of 6.45.

The government has proposed to borrow Rs 4,50,000 crore in 2009-10, which poses the risk of rising interest rates. Inflation may also rise above 5 per cent in the first quarter of 2010, putting further pressure on rates.

A slowdown in economic growth since the last few quarters has meant that private demand for funds is weak. This, coupled with the RBI’s policy of flooding the markets with money, it also means that “liquidity” in the money markets is comfortable.

High government borrowing does not necessarily mean a spike in interest rates in the near-term because of the high liquidity.

“However, this comfort could turn out to be ephemeral. At the first sign of economic recovery and increased private sector appetite for funds, be prepared for a rise in interest rates,” said Abheek Barua, chief economist, HDFC Bank.

B Prasanna, managing director & CEO, ICICI Securities Primary Dealership, which trades in government securities, said, “Central banks across the world and in India would be looking at tightening the interest rate regime that economies are enjoying now and would make us see periods where the yield would fall in the short-term before rising again.”

Managing the government’s borrowing programme will remain a challenge. The RBI immediately after the budget doubled the auction of government bonds later this week to Rs 14,000 crore from Rs 7,000 crore scheduled earlier.