India sets unscheduled $2.9 billion bond auction; markets wary

India will sell 150 billion rupees ($2.9 billion) of bonds on December 30 in an unscheduled auction to partially offset a 40 billion rupee auction cancelled last month and to fund an "emerging cash requirement", the Finance Ministry said.
Traders said the move would likely unsettle a market already worried that India will be forced to announce additional borrowing for the current fiscal year as slowing economic growth eats into tax revenue and puts its fiscal deficit target in jeopardy.
"The announcement of unscheduled government borrowings will put upward pressure on the yield curve," said Shakti Satapathy, a fixed-income strategist at A.K. Capital. "The tight liquidity condition might warrant issuance of cash management bills."
The government will sell 30 billion rupees each of 7.99 percent 2017 bonds, 8.28 percent 2027 bonds and 8.83 percent 2041 bonds, as well as 60 billion rupees of 9.15 percent 2024 bonds, the ministry said in a statement on Monday.
The benchmark 10-year government bond yield, which closed at 8.49 percent on Monday before the auction announcement, is expected to open at least 5 basis points higher on Tuesday, two traders at foreign banks said.
Traders said they would watch for possible buyback announcements on Tuesday for clues on the market's direction.
They said it was unclear whether the funds to be raised were in addition to planned borrowing that the government has already announced for the current fiscal year, or just a change in the borrowing calendar.
In recent weeks some market players have said New Delhi may need to announce additional borrowing of roughly 400 billion rupees in the fiscal year that ends in March.
He said the government may choose to meet part of its additional borrowing requirement in the form of cash management bills or treasury bills.
Liquidity in the banking system remained tight on Monday with banks borrowing 1.429 trillion rupees ($27.06 billion) from the Reserve Bank of India's repo window, significantly more than the central bank's comfort level of around 600 billion rupees. The ministry said the auction is a partial modification of its issuance calendar due to cancellation on November 11 of an auction of 7.99 percent 2017 bonds.