Bond yields to go up, Government starts Open Market Operation

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Government starts Open Market Operation
The Government on Thursday announced that it will increase its borrowing plan by Rs 52,872 crore during the second-half of current fiscal year.

With this the market borrowing through dated securities during the second half will go up from Rs 1.67 trillion to Rs 2.2 trillion, making it to Rs 4.7 trillion for the fiscal.

R. Gopalan, economic affairs secretary, said that “The change in the programme was required because of lower government cash balances and a projected drop in small savings for the year, this will not affect the fiscal deficit target of 4.6% of GDP.”

Rising interest rates have declined the small savings rate in India, hence it was necessary to absorb more cash from the market.

Many fear that the move may cap the private borrowing in India, because there are chances the interest rates will go up.

The news was quite surprising for the bond markets, which resulted into the rise in bond-yields. Usually, when Government enters into the Open Market Operation (OMO) to borrow money from secondary market, the price of existing bonds fall so as to make existing bonds more competitive, which in turn rises the yields of bond.

The government has already raised Rs. 2.5 trillion from the market in the first half of the fiscal year.

Analysts say, government may increase its borrowing again to meet the revenue targets as it is already falling short due to high interest rates in the economy.

The additional borrowing will again spur the bond yields, which would force banks or bond holders to book their losses.

Banks may go and keep purchasing expensive bonds so as to reap the benefit when interest rates in India start declining, which is expected to decrease after the first quarter of next year.

Government's first auction is starting from October 3 – 7, 2011 where it will issue government dated securities of Rs 15,000 crore.

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Read more about: interest rate, government, bond, economy
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