Govt raises 27.5% of total loans in 2 months

The report said the securities market was in a "confused state of affair" despite the higher mop up. "On the one hand, liquidity is comfortable and on the other, yields (in government securities market) have firmed up in view of uncertainties and speculations regarding the exchange rate of the rupee," it said.

The situation has further worsened with a rise in the inflation rate owing to higher fuel prices and hike in administered prices, the report said. However, with monsoon expected to be normal there is no need to panic, it added.

PNB Gilts said under these conditions, Reserve Bank of India also appeared to be in the midst of a tightrope walk in balancing the objective of defending the rupee and managing the government borrowing.

RBI recently sold 15-year government paper to suck liquidity in the face of volatility on the forex market and also to judge the market demand for longer dated papers, PNB Gilts said. Of the total debt raised so far, the government mopped up Rs 27,000 crore through auction of dated securities, Rs 2,683.45 crore through sale of 15-year paper and Rs 2,500 through treasury bills.

About the forex market, it said foreign institutional investors (FIIs) though have been net sellers in May, the withdrawals are significant in view of the huge reserves of 37 billion dollars and thus will not affect the value of rupee. "Fluctuations may continue in the short term but the long-term prospects appear to be good and there is enough reason for foreign capital to stay invested in India," it added.