Rising bond yields have led to a sharp spike in the government?s borrowing cost, which has risen by at least 2 percentage points, forcing the Centre to review its market borrowing plan. The government has now started looking at other avenues to cut extra expenditure and maintain fiscal discipline.
High inflation and fear of fiscal deficit shooting above the targeted level of 4.6% of the GDP have pushed bond yields up. Going forward, the government now wants to plan its borrowings keeping in mind the quantum of monthly refunds.
In order to improve its tax services, the Centre refunded taxpayers R46,868 crore in April-June 2011, as compared to R15,366 crore in April-June 2010 ? a 205% jump. The income tax department plans refunds worth R1 lakh crore in 2011-12.
This massive refund exercise, however, led to a shortage of cash for the Centre, prompting it to sell cash management and treasury bills. The government raised R32,000 crore through cash management bills in April and May, as well as more treasury bills than expected during April-June.
While high refunds per sedo not pose any difficulty, the government debt managers are baffled as they have pushed up its borrowing cost.
The Centre pays only 6% annual interest on refund amount due to a taxpayer. But to meet its cash requirements, the Centre had to pay 8% plus while borrowing through sale of cash management bills and treasury bills.
The government paid yield of about 8% during auctions of 77 days cash management bills in May, while yield on 364 days treasury bills came to 8.29% in debt auction by the Reserve Bank in the same month, according to RBI data.
A government official pointed out that the costs will be contained going forward, as the government will plan its borrowings keeping in mind the quantum of monthly refunds.
Finance minister Pranab Mukherjee said on Tuesday that high refunds led to ?temporary cash flow problems?. He said the government would stick to its borrowing target, pegged at R4.17 lakh crore in 2011-12. The net market borrowings, after making payments, would total R3.43 lakh crore.
Officials acknowledged that bond yields are ?uncomfortably high? and that the government could review its borrowing plan for the second half of the current fiscal. ?The government needs to take concrete steps to bring down fiscal deficit, only then bond yields will come down,? said A Prasanna, MD & CEO, ICICI Securities.
Yield on 10-year benchmark government bond was at 8.27% on Thursday. Inflation rose to 9.44% in June from 9.06% in May. Yields could rise further with RBI expected to raise policy rates 25 basis points on July 26, after increasing them by 275 basis points since mid-March 2010.
?The government can resort to some open market operations or cash management bills but short-term measures will push the short-term yields up. This will not be very effective,? said Kotak Mahindra Bank chief economist Indranil Pan.
?The borrowing calender is planned by RBI and the finance ministry. If they go for postponing or tweaking it, then it will send more jerks to the markets,? Pan said. The government plans to borrow 60% of its total debt in the first half of the fiscal while remaining 40% in the second half.