MUMBAI: India’s gross borrowing target for 2009/10 may be raised to 4-4.25 trillion rupees but revenue from divestment and auction of telecom
Money
spectrum will mitigate the effect of larger supplies, Edelweiss Securities said on Thursday.

At its interim budget, the government had pencilled a record gross market borrowing of 3.62 trillion rupees for 2009/10. The hike in weekly bond auction sizes for the five weeks has led to view that the final target could be raised in the budget. The government may raise about 100-200 billion rupees from stake sales in state-run firms and 250-400 billion rupees from the auction of the third generation telecom spectrum, Edelweiss estimates.

Finance Minister Pranab Mukherjee will present the federal budget on July 6, while Reserve Bank of India Governor D. Subbarao will conduct the first quarterly review of its monetary policy on July 28. The central bank may keep policy rates unchanged in the July policy, while the onus of boosting growth will rest on lending rates charged by banks, Rahul Choksi and Varda Pandey, Edelweiss analysts, said in the note.

The central bank has cut its main lending rate by 425 basis points in six moves since mid-October to 4.75 percent and recent economic data has shown that it may be at the end of its rate cutting cycle. “With the market now pricing in rate hikes by Q4FY10, we believe that the benchmark prime lending rate (BPLR) may not ease more than 50-100 bps, given strained interest margins of the public banking system,” they added.

Edelweiss also said it expects the cash levels in the banking system to fall to about 500-700 billion rupees by December from the present 1.15-1.30 trillion rupees in the central bank’s reverse repo window. Liquidity will may be pulled out by auction outflows and as deployable avenues for funds rise as commercial credit picks up further, they said. Surplus funds, as indicated by the central bank’s reverse repo absorption is now over 1 trillion rupees.

Edelweiss said it expects the wholesale price index as compared with a year-ago to continue falling over the next 2-4 months. Inflation may rise to about 7 percent by March 2010 on account of rising crude and commodity prices, they added. It expects the 10-year bond to range between 6.75-7 percent over the next 4-6 months but in case of a market friendly borrowing target, benign inflation and smaller weekly auctions, it may ease by 20-30 basis points from current levels.

source: Economictimes

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