India will borrow Rs 2.2 trillion ($44.9 billion) in the second half of the fiscal year that begins on Oct. 1, the government said, significantly more than expected, sending bond yields and swap rates higher.
R. Gopalan, economic affairs secretary, said the government's borrowing in the second half of the fiscal year would be 528 billion rupees higher than had been budgeted in February.
Investors had been expecting additional borrowing, if any, to be around Rs 200-300 billion.
Slowing growth in Asia's third-largest economy and rising interest rates to fight high inflation have put pressure on government finances, and New Delhi is far behind target on its plans to sell holdings in state-controlled companies.
The government had in the February budget pencilled in gross market borrowing of Rs 4.17 trillion for the 2011/12 fiscal year, to help bridge a fiscal deficit that is forecast to be at 4.6 per cent of the GDP.
It has already completed borrowing of 2.5 trillion between April and September, and the full-year borrowing now stands at Rs 4.7 trillion.
The benchmark 10-year bond yield spiked 8 basis points to 8.43 per cent immediately after the announcement. The benchmark 5-year swap rate rose 12 bps to 7.15 per cent and the one-year rate rose 6 bps at 7.96 per cent, traders said.
"Increased supply in an elevated policy rate environment would exert upward pressure on yields," said Nagaraj Kulkarni, a senior rates strategist at Standard Chartered Bank said.
Gopalan said the additional market borrowing was required due to lower government cash balances and a lower pool of small savings, but will not change the fiscal deficit target of 4.6 per cent of gross domestic product for the current fiscal year.
Gopalan declined to comment on whether the government would reduce its disinvestment target of Rs 400 billion in light of the current market turmoil.