RBI has cancelled a government bond auction worth Rs.15,000 crore

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gsr545The Reserve Bank of India (RBI) has cancelled a government bond auction worth Rs.15,000 crore, noting the government’s “cash position and funding requirement”, the central bank said on its website.

There has been greater comfort on the government’s finances in recent days, with the latest round of telecom spectrum auction seeing bids worthRs.40,000 crore being put in on the first day of the auction on Monday. According to a department of telecommunications official, the government expects to receive bids totalling around Rs.50,000 crore at the end of the third day of the second generation, or 2G spectrum auction.

In budget 2013-14, the government had said it expects a revenue ofRs.40,847 crore from spectrum and other fees. In addition, the government has cut back on expenditure in the last few months to keep the fiscal deficit within a self imposed target of 4.8% of the country’s gross domestic product.

“The cancellation of the auction confirms that government finances are in good shape. Already we have seen that the telecom auctions are a success and even if all the participants choose to pay in instalments, then we can easily expect Rs.12,000 crore to Rs.13,000 crore to flow into government coffers,” said Harihar Krishnamoorthy, head of treasury at First Rand Bank Ltd.

The auction now cancelled, was originally scheduled for 17 January and was deferred. The cancellation of the auction will result in the government’s market borrowing decreasing by Rs.15,000 crore, RBI said.

The central government’s net borrowing was set at Rs.4.84 trillion as announced in Budget 2013.

“On review of the Government of India’s cash position and funding requirement, it has been decided to cancel the deferred auction scheduled on 17 January 2014 for Rs.15,000 crore. This would result in decrease in Government market borrowing programme for 2013-14 to that extent,” the finance ministry said in a separate statement.

Bond yields have softened in anticipation of the reduced government borrowings and the comfortable liquidity position in the market. The yield on the 10-year benchmark bond dropped 14 basis points to 8.68%, over three trading days till Monday. On Wednesday, mild profit booking pushed the 10-year yield higher by 3 basis points to 8.71%. One basis point is one-hundredth of a percentage point.

To be sure, while the 10-year bond yield has eased, short-term borrowing costs for the government remain elevated. At an auction of 91-day treasury bills conducted on Wednesday, the cut-off yield came in at 8.9807%, the highest since 21 November, as traders offered low prices for the bond. A low price indicates more return on the bond and thus a higher yield.

Bond market dealers said this because of the liquidity shortage anticipated post March.

“We expect liquidity tightness soon after March. The overnight rates should touch 9% and thus bond maturing around that time should reflect the future paucity of liquidity,” said Devendra Dash, a senior bond dealer at DCB Ltd.

The rise in short term yields along with a softening of long-term yields has led to an anomaly known as ‘inverted yield curve’ in bond market parlance, which as per economic theory, can also be an indicator of an impending slowdown.

Meanwhile, government bonds worth Rs.27,000 crore maturing in 2014-15 and 2015-16 have also been switched to a longer tenor with “an institutional investor” last week, RBI said in the release, without naming the investor.

In budget 2013-14, the government had announced a plan to switch short-term debt for longer dated bonds, by buying Rs.50,000 crore in shorter term debt and in turn selling longer dated bonds. The aim was to spread out redemptions over a longer period of time.