In a bid to calm a nervous bond market, the central government on Thursday decided to trim its gross market borrowing target for the second half of this fiscal by Rs 10,000 crore. The cut is despite the fact that only on Wednesday it took an additional spending pledge of Rs 44,762 crore to extend a free ration scheme by there months.
The government will now borrow Rs 5.92 trillion through dated securities in the second half, or 41.7% of the revised full-year target of Rs 14.21 trillion, the finance ministry said, a day before a widely-expected rate hike by the central bank.
Of the total H2 target, Rs 16,000 crore will be raised through the maiden issuance of sovereign green bonds. The size, however, is lower than analysts’ expectations of anywhere between Rs 20,000 crore and Rs 35,000 crore. The government will end the first half with a total borrowing of Rs 8.29 trillion, lower than the aim of Rs 8.45 trillion.
A senior finance ministry official told FE that the government has adequate leeway available to raise its offtake from the National Small Savings Fund (NSSF) if there is a pressing need for it to partly finance the fiscal deficit. The government had budgetted its offtake from the NSSF to drop to Rs 4.25 trillion in FY23 from a record Rs 5.92 trillion in FY22.
Importantly, higher-than-budgetted tax mop-up and savings through revenue expenditure compression and other means should largely make up for greater spending pledges and higher subsidy outgo, he added. The Centre’s additional spending commitments on food, fertiliser and fuel subsidies this fiscal may turn out to be in excess of Rs 2.5 trillion from the budgeted level, thanks mainly to the Ukraine war.
The benchmark 10-year government bond yield ended almost flat on Thursday closed at 7.34%, despite a drop in yield in the US. It has risen substantially from 6.81% at the end of March but is off its June peak.
The government had budgeted a gross market borrowing of Rs 14.31 trillion (after adjusting for the conversion of short-term maturities into long-dated bonds).
According to the finance ministry, the gross market borrowing of Rs 5.76 trillion (excluding green bonds) will be through 20 weekly auctions. The government will continue to exercise the green-shoe option to retain an extra subscription of up to Rs 2,000 crore against each of the securities indicated in the auction notification. The amount raised through this option will be limited to 3-5% of the gross issuance for H2.
The borrowing will be spread over 2, 5, 7, 10, 14, 30 and 40 years securities. The share of borrowing (excluding green bonds) under different maturity periods will be: 2 years (6.25%), 5 years (12.15%), 7 years (10.42%), 10 years (20.83%), 14 years (19.10%), 30 years (15.63%) and 40 years (15.63%).
The government will continue to carry out switch operations “to smoothen the redemption profile”. As much as Rs 56,103 crore of the budgeted Rs 1 trillion of switch amount for FY23 have already been conducted.