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Wednesday, April 28, 2010

3G sale sparks govt borrowing breather hopes

Expectations that revenue from India's auction of third generation (3G) mobile licences will exceed targets has sparked hopes among bond investors that the government will curtail borrowing in the first half of the year.

Though it is too early for the government or the central bank to decide whether to postpone any scheduled bond auction, bond yields may fall by 10 basis points if there is any such surprise announcement and flatten the yield curve, dealers said.

The government is scheduled to borrow 2.87 trillion rupees ($64.3 billion) during the first half the fiscal year that began April 1 out of a total 4.57 trillion rupees for the full year, a record haul that has fatigued investors and sent yield on the 10-year bond above 8 percent.

"If the government is able to raise a higher amount of funds through 3G, then it may afford to skip one auction or postpone it," said Ananth Narayan G, head of rates and credit for South Asia at Standard Chartered Bank.

The government expects to generate around 500 billion rupees ($11.2 billion) from the 3G auction, far ahead of its budgeted estimate of 350 billion rupees.

"The market has accounted for a lot of bearishness. So such news will obviously be a good news and bonds will rally," Ananth Narayan said.

However, if a one-time outflow of 500 billion rupees to pay the government for 3G licences coincides with advance tax payments due in June, it may cause a severe strain on liquidity and send overnight rates sharply higher from existing levels.

A hefty redemption of around 340 billion rupees of bonds in May and June may ease the shock.

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