Swati and Aftab Ahmed

NEW DELHI/MUMBAI – India’s government could conduct additional debt auctions in order to benefit from the very low cost borrowing, according to two sources familiar with the matter.

As global yields rose and the state achieved comfortable cash reserves for the fiscal year ending March 31, the government cancelled two of its weekly debt sales totalling 240 billion rupees ($3.21billion).

In a surprising move, markets were surprised Monday when the government announced that it will borrow 230 Billion Rupees during the final bond sale of the fiscal year. This was on Feb. 25, 2012.

According to sources, the government has a healthy cash balance even without any auctions. However, it may consider borrowing more if necessary.

If this is our final borrowing for the year, we won’t commit. A senior official who was directly involved in the case told Reuters that they are keeping an eye on the yields and would make a call accordingly.

According to a second source, the government should borrow immediately to benefit from the lower yields.

Following the announcement by the government of a record 14.95 Trillion rupees worth of borrowing in 2022/23, the benchmark 10-year yield reached 6.95%.

However, yield is now at 6.73%, as it was after the auction cancellations.

India’s Finance Ministry did not respond immediately to mail requesting comments.

Although the government claimed that the auctions were cancelled because of a cash surplus, sources told Reuters that officials were worried about market reactions after the announcement.

However, trader warn that new auctions may drive yields up again.

We believe that this is the end of our borrowing in 2011. A senior foreign bank trader said that if the government borrows towards cancelled auctions, there will be a lot more pressure on bonds.

According to a private-bank trader, “If there are more auctions this years, the yields will probably climb back up to 6.95% levels.”

($1 = 74.925 Indian rupees