New Delhi: The government chose to borrow a smaller portion of its annual target in the first half of the next fiscal year, departing from its usual practice, amid rising bond yields and diminishing demand for government securities.
It also expects to borrow around Rs50,000 crore less than its Rs6.05-trillion market borrowing programme announced in the budget for the year starting 1 April 2018 by reducing bond buybacks and increasing its borrowing from National Small Savings Fund (NSSF).
On Monday, the government said that it will raise Rs2.88 trillion by selling bonds in the six months to 30 September, about 47% of its budgeted amount for the full fiscal year. This is the lowest first-half borrowing in the last 10 years in percentage terms, according to State Bank of India research.
The government borrowing programme was designed by the centre after consulting the Reserve Bank of India (RBI). Typically, at least 60% of the government borrowing is completed in the first half. This is because deposits mobilization is usually higher in this period, while credit demand is low.
The lower first-half target for the year starting 1 April is expected to give some relief to bond investors and help the government lower its borrowing costs.
Bond yields have surged almost 100 basis points over the last six months owing to expectations of rise in interest rates following the widening of the current account deficit, the rapid reduction in banking system liquidity and prospects of faster rate hikes in the US.
Lower participation by state-run banks, the largest customers for government paper, has also added to rising bond yields. Commercial banks hold 30% of their deposits in government paper despite regulatory rules mandating only 19.5% currently. On Monday, the 10-year yield closed at 7.608% compared to its previous close of 7.557%.
“With the lower supply of securities, along with issuance of floating rate bonds (FRBs) and reduction in share of 10-14 year maturity bonds to 29% from 50% previously, should be positive for the market. However, some of the near-term risks are pushed forward with backloading of the borrowing programme,” said A. Prasanna, chief economist at ICICI Securities Primary Dealership.
In the year ending 31 March, the government had planned Rs3.72 trillion borrowing in the fiscal first half.
For fiscal 2019, the total gross borrowings through government securities is budgeted at Rs6.05 trillion, higher than previous year’s budget estimate of Rs5.80 trillion, which was later revised to Rs5.99 trillion.
According to a finance ministry statement, the government also plans to issue more FRBs and introduce retail inflation-linked bonds. The issuance of these securities put together would be 10% of the total gross borrowings.
Bond dealers, who met finance ministry officials last week, had pitched for more FRBs as they tend to have lower risks as their interest rate is reset every six months and helps minimise risk of fluctuating rates in the market.
The government also said that it intends to use larger inflows from small savings schemes to fund its fiscal deficit during the year. Accordingly, it will borrow Rs1 trillion from the National Small Savings Fund as against the budgeted amount of Rs75,000 crore.
“With this borrowing programme, we are absolutely confident we will be able to meet all the expenditure requirements of the government without getting into an overdraft situation. We have one more instrument available to us in the cash management bills of Rs1 trillion which we will use,” said Subhash Chandra Garg, economic affairs secretary in the finance ministry.
According to economists, while dipping into NSSF will help, backloading of government borrowing may keep bond yields elevated because outlook on interest rates in the economy is negative and may also crowd out private borrowings. Second half of the fiscal is usually the busy time for credit demand.
“Certainly, it is no indication that we are pushing more borrowing towards the second half. If you factor in additional fund flows from elsewhere, our second half borrowing will not be crowded. It means overall borrowing will be less,” said Garg.
Still, an increase in the limit for foreign portfolio investors (FPI) to buy government bonds will help increase demand.
“It may be noted that the government and RBI are in the final stage of discussions for increasing FPI limits from April 1, 2018,” according to the finance ministry statement.
The current framework for FPI investment expires this month.
Currently, FPIs have exhausted 96.93% of the available limit for investing in Indian government bonds. This is essentially for FPIs under open category, which is most active.