Views: Revised borrowing calendar

Yesterday government announced that it would borrow the Rs 1.1 lac crores of bonds, on behalf of the states. Later in the evening RBI announced modified borrowing calendar of the central government.

Major changes in calendar are (see table attached at the end):

1: The additional borrowing is restricted to Rs 55k crore each in 3y and 5y segment

2: The calendar is increased from end-January 2021 to mid-March 2021.

3: The weekly borrowing numbers for the residual maturities have reduced significantly.

4: The cumulative borrowing for residual maturities remains same.

5: The weekly borrowing numbers are no more constant, varying from 31k to 17k crore.

The fiscal deficit for Central Government will not change as it will provide a back-to-back loan to state government.

Since a part of market believed that the Rs. 1.1 lac crore would earlier have been borrowed by States from RBI, this new announcement has, according to them, added to the market borrowing.

We expect Central Government securities to be sold, and probably a rally in SDL. Of course the 3y to 5y segment will be worst hit.

The SDL OMO announced post policy look less likely now that the borrowing has been shifted to center.

We had entered long in 5y at 5.30-35% yield. Whilst we are comfortable with 2y segment, the 5y trade is crowded; we had mentioned the risk of crowded trade at the initiation. The additional borrowing may lead to a whiplash sell-off. There is a strong possibility that RBI may conduct OMO to support this segment, but they will only be announced if the yields move higher. However with the 5y yield already 10 bp higher we would prefer to hold on to the position ( currently near entry level). There is Rs. 8000 cr. auction today for the paper, and the risks remain that yields could rise higher, but that risk, for the time being, is countered by expectations of RBI market purchase.