Hardening bond yields: Centre to put a lid on gross borrowing in FY23

The Central government will likely keep its gross market borrowing target for the next fiscal close to the likely FY22 revised estimate of Rs 12-13 lakh crore to prevent any flare-up of bond yields, as the economy still faces substantial price pressure amid strong external headwinds.

The net market borrowing is expected to be Rs 3.8 lakh crore lower than the gross level in FY23. Yet, the Centre’s borrowing will likely remain at an elevated level (in excess of Rs 12 lakh crore) for a third straight year in the wake of the Covid outbreak.

The bond market is nervously awaiting the government’s Budget announcements. The yield on the benchmark 10-year government securities (G-secs) has topped 6% since June 3, 2021. It hit a two-year high on January 17 before easing a tad to 6.63% on Friday, with risks to the upside. The Centre’s weighted average cost of borrowings in FY21 was at a 17-year low of 5.79%, thanks to a regime of low interest rates that prevailed.

Already, brent crude oil prices are hovering around a seven-year high and raw material costs are on the rise globally. With inflation hitting a 40-year high in the US, the Federal Reserve is expected to accelerate the pace of tapering its asset purchases and hike the interest rate earlier than expected in 2022. This may put pressure on the Reserve Bank of India to start raising the benchmark lending rate early next fiscal if retail inflation, which hit a six-month peak of 5.59% in December, remains stubbornly high.

On top of this, if the Centre goes ahead with the planned ceasing of GST compensation to states from FY23, their fiscal deficit will go up, raising their borrowing requirements. Against such a backdrop, it may choose not to crowd out borrowing plans of states and private players, analysts reckon.

Instead, the Centre may tap the National Small Savings Funds more aggressively to part-finance its fiscal deficit should the situation so warrant, apart from relying on the listing of certain categories of G-secs on global bond indices to raise funds, some analysts say.

Icra chief economist Aditi Nayar predicted the Centre’s gross market borrowing to touch Rs 12.9 lakh crore next fiscal, while SBI group chief economic advisor Soumya Kanti Ghosh pegged it at Rs 12 lakh crore. India Ratings chief economist DK Pant expected the borrowing to rise to Rs 12.4 lakh crore and Bank of Baroda chief economist Madan Sabnavis projected it to be around Rs 12-13 lakh crore.

The Centre’s net market borrowing is projected to ease a tad and remain in the range of Rs 8.2 lakh crore to Rs 9.1 lakh crore for FY23.

As for the current fiscal, the estimates of the gross market borrowing, firmed up by the economists, range from Rs 11.9 lakh crore to Rs 13 lakh crore and net borrowing between Rs 9.3 lakh crore and Rs 10.4 lakh crore. The Centre had budgetted a gross market borrowing of Rs 12.1 lakh crore and net of Rs 9.2 lakh crore for FY22, as fiscal deficit is targeted to touch 6.8% of GDP (or Rs 15.1 lakh crore).

Nayar’s assumption of the FY23 market borrowing is based on the Centre’s fiscal deficit of 5.8% of GDP (Rs 15.2 lakh crore) in a base-case scenario; it may worsen to 6.9%, or Rs 17.9 lakh crore, in adverse conditions when there is mild Covid wave in the next fiscal. Ghosh has projected the FY23 deficit at 6.3% (or Rs 16.5 lakh crore) and Pant at 5.8-6%.

Importantly, once the requirements of states are factored in, the general government gross market borrowing will likely range from Rs 22.6 lakh crore to as high as Rs 24.3 lakh crore in FY23, compared with an estimated Rs 20.9 lakh crore this fiscal, according to Icra. SBI’s Ghosh expects it to rise to Rs 21 lakh crore in FY23 from Rs 19.7 lakh crore for this fiscal.

Importantly, the RBI undertook open market operations (OMOs) of around Rs 2.6 lakh crore in the current fiscal to support a large government borrowing programme without disruptions. “In FY23, sans the support of such OMOs, but with Rs 1.5 lakh crore expected through inclusion in bond index and credit off take also picking up recently, there will still be northward pressure on bond yields. Unless EM bond index announcement happens in the Budget with first inflows starting in H2FY23, bond yields are in for major realignments in FY23,” Ghosh said in a report.