India Cuts Borrowing as Chidambaram Curbs Spending

India cut its annual borrowing program as Finance Minister Palaniappan Chidambaram reined in spending and raised as much as 220 billion rupees ($4 billion) selling stakes in state companies.

The finance ministry canceled a 120 billion rupee bond sale previously scheduled for Feb. 22, the last for the year ending March 31, “on review of the government’s cash position and funding requirement,” it said in a statement yesterday. Prime Minister Manmohan Singh’s administration planned to borrow a record 5.69 trillion rupees this fiscal year before scrapping this week’s debt auction, according to budget documents.

Chidambaram, scheduled to present the federal budget later this month, is under pressure to curb spending and keep his pledge to cut the deficit to 3 percent of gross domestic product in four years, from a targeted 5.3 percent in the 12 months ending March 31. Officials are trying to avert a credit downgrade after Standard & Poor’s and Fitch Ratings said in 2012 that they may demote India to junk status, citing the shortfall and a widening current-account gap.

“Fiscal consolidation is the driving story,” said Shubhada Rao, the Mumbai-based chief economist at Yes Bank Ltd. “There would be prudent expansion of the government balance sheet next year” as Chidambaram seeks to reduce the budget gap to 4.8 percent of GDP, she said.

Asset Sales

The government’s cash position may have improved after increasing revenue collection and raising about 220 billion rupees in the year that started April 1 from sales of stakes in companies including NTPC Ltd., the nation’s biggest power producer, and NMDC Ltd., the biggest iron ore miner.

Net direct tax collection in the April-January period rose 12.5 percent from a year earlier to 3.9 trillion rupees, the finance ministry said in a statement on Feb. 6.

The auction cancellation will help ease a cash squeeze in the banking system caused by slower government spending, according to Nomura Holdings Inc. Lenders borrowed an average of 1.03 trillion rupees a day from the central bank via repurchase contracts this month to meet shortages, compared with 941 billion in January.

The Reserve Bank of India bought 1.3 trillion rupees of government securities this fiscal year via open-market auctions to boost cash at banks, up from 336 billion rupees a year earlier, according to data compiled by Bloomberg.

‘Positive Signal’

“This is a positive signal for the markets,” said Vivek Rajpal, a Mumbai-based strategist at Nomura. “Huge government balances were straining liquidity and policy makers had an option to either cancel the auction or prompt the central bank to purchase more debt.”

Benchmark 10-year bond yields dropped 22 basis points this year, and the 8.15 percent note due in June 2022 was at 7.83 percent yesterday in Mumbai, according to data compiled by Bloomberg. Indian government notes returned 2.4 percent in the past 12 months, the best performance in Asia, according to indexes compiled by HSBC Holdings Plc. Local fixed-income and foreign-exchange markets are closed for a public holiday today.

Rajpal predicted the 10-year yield will move in the coming days toward 7.75 percent, a level not seen since July 2010, and estimated the government’s surplus cash at 900 billion rupees.

The debt-sale cancellation is “slightly positive” for the bond market, said Rajeev Radhakrishnan, head of fixed income at SBI Funds Management Pvt. that manages the equivalent of $10 billion in Indian assets. The central bank may conduct at least two more open-market debt-purchase auctions in the coming month to improve funding availability, he said.

‘Fiscal Consolidation’

RBI Governor Duvvuri Subbarao, who cut the benchmark interest rate by 25 basis points last month to 7.75 percent in the first reduction since April, has cited budget and current-account deficits along with inflation among those constraining further cuts in borrowing costs.

“We have taken note of the road map for fiscal consolidation put out by the finance minister,” Subbarao said on Feb. 7 in Guwahati in the eastern state of Assam. “We are also looking forward to the budget to get a better understanding of how fiscal consolidation will be done.”

Inflation, based on wholesale prices, declined to a 38-month low of 6.62 percent in January while the government predicts the $1.8 trillion economy will expand 5 percent in the year to March 31, the least in a decade.

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