Mumbai, April 5: Banks fearing losses in their bond portfolio because of the government’s massive borrowing programme can rest easy.

The Reserve Bank of India is lining up an array of measures that are largely expected to protect their books. These include open market operations, buying of securities under the market stabilisation scheme and a possible cut in key rates.

For the first half of this fiscal, the government has announced a gross borrowing programme of Rs 2,41,000 crore, higher than the Rs 1,06,000 crore made in the same period last year. This has resulted in bond interest rates crossing the 7-per-cent mark and their prices taking a beating on market expectations of the government selling debt papers for the borrowing programme.

Interest rates are inversely related to bond prices, rising when the latter falls and vice versa. In the first week of January, the rate on the government’s 10-year bond had dropped to a record low of 4.86 per cent.

When bond prices fall, banks’ balance sheets may take a hit because of mark-to-market losses. Mark-to-market is an accounting process, under which banks record the value of an asset, such as a bond, at its current market value, which may differ from its purchase price.

Banks are, however, confident of prices not falling much as they expect the RBI to take action to limit their losses. The central bank has in the past few days been buying back government bonds to infuse liquidity into the market.

“The RBI has been doing well. It has not just managed liquidity, but psychology as well and it will continue to do so. We should therefore, not get too worried about the Rs 2.41 trillion borrowing programme,” says Harihar Krishnamurthy, country treasurer, Development Credit Bank, who expects the rate on the benchmark 10-year government bond to move between 6.50 per cent and 7.25 per cent.

In step with the government announcing the borrowing plan on March 26, the RBI has given an outline of the strategies to be adopted for shovelling funds in the system.

Recently it said that in the first half of this year, it would buy back securities worth Rs 42,000 crore which it had sold under its market stabilisation scheme. This comprises Rs 33,000 crore of dated securities and Rs 9,000 crore of treasury bills.

Market stabilisation scheme is an RBI strategy to mop up excess dollars from the system.

Before the recession bared its fangs and crude prices had shot up to $145 per barrel, dollars had poured into the system which needed to be mopped up, otherwise their rupee equivalent sum would have raised prices and created other problems of liquidity management. The RBI undertook market stabilisation by selling government securities.

The Reserve Bank will also purchase government securities under its open market operations to the tune of Rs 80,000 crore in the first half (April-September) of 2009-10.

Open market operations are the buying and selling of securities which the government does to control the amount of liquidity in the system. Bond market circle say redemptions of government paper of over Rs 30,000 crore are also set to happen over the next six months.

“Looking into all these, the market will have to absorb around Rs 90,000 crore of government securities in the six month period, which is not extremely large,” adds an analyst of a private sector bank.

This apart, there are expectations of the central bank bringing down its reverse repo rate by another 50 basis points. The reverse repo is the rate at which the RBI borrows funds from banks against securities. It has been reduced in two stages to 3.5 per cent in March from 5 per cent in December.