Bond yields inch up on unscheduled Rs. 150bn auction

Yields on the benchmark 10-year Government bonds climbed to a three-week high on Tuesday after the Government announced a surprise Rs 150bn auction late on Monday. The Government said it will sell Rs. 150bn of bonds on December 30 in an unscheduled auction to partially offset a Rs. 40bn auction cancelled last month and to fund an emerging cash requirement. The move unsettled markets amid growing concerns about the bloated fiscal deficit. The Government is widely expected to miss its target of paring budget shortfall to 4.6% of GDP in FY12 due to deceleration in tax collection and higher spending. In late September, the Government increased its market borrowing estimate for the October-March period to Rs. 2.2 trillion, from Rs. 1.67 trillion. Liquidity in the banking system remained tight on Monday with banks borrowing ~Rs. 1.43 trillion from the RBI's repo window, significantly more than the central bank's comfort level of around Rs. 600bn. Traders in the money market expect more open market operations from the RBI to ease the tight cash conditions. Separately, the RBI and the Government on Friday released an updated calendar for the fourth quarter. The Centre would borrow an additional Rs 400bn in the remaining part of FY12 to meet the budget shortfall.