Budget 2020: Increase in market borrowing figures seem to be in line with expectations

Union Budget 2020 India: With the government pegging the net market borrowing for FY21 at Rs 5.36 lakh crore and the revised figure for FY20 at Rs 4.99 lakh crore, bond market participants believe yields are unlikely to react negatively in the near term as the increase in borrowing figures seem to be mostly in line with market expectations.

The revised net borrowing for FY20 came in higher by about Rs 50,000 crore from the budgeted estimates. The gross market borrowing for FY21 has been pegged at Rs 7.8 lakh crore, while for FY20, the revised figure remains unchanged at Rs 7.1 lakh crore.

Siddharth Shah, head of treasury at STCI Primary Dealer, told FE that the government’s borrowing figures are in line with his expectations. “The market was worried about the current year’s additional borrowing which has not materialised. That is a pleasant surprise from a bond market’s perspective and I believe the market will look at it positively on Monday. You may see a five-basis-point fall in the yield,” he said. The benchmark yield had closed at 6.60% on Friday.

The rise in fiscal deficit revised estimate (RE) for FY20 by 50 bps at 3.8% and the target for FY21 at 3.5% are also in line with market expectations. However, some experts anticipate an overhang on the bond markets in the long term as they believe the disinvestment target for FY21 could be too ambitious.

MS Gopikrishnan, an independent market expert, pointed out that the government has refrained from doing a buyback of `50,000 crore in FY20 that was planned earlier and that added to the net borrowing figure. “Going forward, FY21 has a buyback figure slotted at Rs 30,000 crore. This is again a crucial figure because there is a leeway for the government not to do this buyback next fiscal year. What is of concern is the ambitious figure of Rs 2.1 lakh-crore disinvestment figure for FY21,” he said.

Meanwhile, the limit for foreign portfolio investment in corporate bonds, that currently stands at 9% of the outstanding stock, will be raised to 15% of the outstanding stock. Market experts peg the outstanding stock of corporate bonds at just above Rs 35 lakh crore. At 15% of outstanding stock, FPIs are likely to get a limit of over Rs 5.20 lakh crore in corporate bonds against the existing limit of Rs 3.17 lakh crore.

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FPIs have not been very bullish on Indian corporate bonds in recent times. According to NSDL data, foreign investors have utilised only 57.99% of their available limits. With the government proposing to extend the lower withholding rate of 5% for interest payment to FPIs and Qualified Foreign Investors (QFIs) in respect of Indian bonds by a period of three years, experts believe there could be a renewed FPI interest in Indian debt.

Ajay Manglunia, MD & head of institutional fixed income at JM Financial, said the clear road map in terms of the withholding tax is a positive step. “There is significant liquidity floating around in global markets with persistent hunger for yields — something that they could easily find in good quality Indian corporate bonds,” he said.