No offshore bond for now, Modi govt sticks to budget targets

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Updated: October 1, 2019 7:04:17 AM

To borrow Rs 2.68 lakh crore in H2, against Rs 4.42 lakh crore in H1.

The last two auctions, however, will be worth Rs 14,000 crore each. Floating rate bonds to the extent of 10% of gross issuances would be flaoted during the year, he added.

The government on Monday indicated its maiden offshore bonds issuance might not materialise this fiscal but stuck to its budgeted gross market borrowing target and the fiscal glide path, despite projecting a gross revenue forgone of Rs 1.45 lakh crore due to a sharp cut in the corporate tax rates.

Economic affairs secretary Atanu Chakraborty said the Centre will borrow Rs 2.68 lakh crore from the market in the second half of this fiscal through dated securities, and the entire borrowing would be denominated in the rupee.

The government had budgeted to borrow Rs 7.10 lakh crore in FY20, of which it has already borrowed Rs 4.42 lakh crore in the April-September period, or 62.25% of the full-year target. An official source told FE that the borrowing plan could be evaluated again once the supplementary demands for funds from various departments are placed in the third quarter.

Analysts said higher-than-anticipated rupee borrowing and the potential deferment of the overseas sovereign bond issue plan (which was aimed at easing pressure on the domestic markets) could cause bond yields to rise, at least in the short term. This will be particularly a peculiar scenario if the monetary policy panel chooses to cut the repo rates again in October. The yield on benchmark 10-year G-secs has been under 7% for months now. The yield settled at 6.7% on Monday, marginally lower than the previous close.

Commenting on overseas sovereign bonds, the secretary said the securities to be raised in external currency are decided on the basis of current price, market appetite and market conditions and related issue and the structuring of the bond itself. “We need very careful calibrations and deliberations before it enters in the market. The work on that is presently going on and it is a process which is long. For this year, all the borrowing of the government will presently be in rupee-denominated bonds,” the secretary said.

Seeking to allay concerns over the fiscal fallout of the tax rate cuts, Chakraborty asserted that the government will stick to the glide path of keeping FY20 fiscal deficit at 3.3% of the GDP. He, however, didn’t elaborate on how the government intended to bridge the potential revenue shortfall. Although the government has received an extra Rs 58,000-crore in surplus transfer from the Reserve Bank of India for FY20, growth in net tax receipts was just 10.5% up to August (before the latest cuts were announced), against the budgetted 29.5%. Even disinvestment proceeds stood at just 12% of the full-year target. Already, the centre’s fiscal deficit touched 78.7% of the full-year target in the first five months of FY20.

“Rs 2.68 lakh crore borrowing indicates that the fiscal glide path as indicated in the budget is being maintained,” he said.
However, given that the government may resort to undeclared extra-budgetary resources (EBRs) to fund spending (as is the practice in recent years), the actual impact of the government’s market borrowing remains hazy, said some analysts. Even excluding a big chunk of such borrowings for railways capex, the government’s extra-budgetary resources rose from Rs 2.73 lakh crore in 2016-17 to as much as Rs 5.27 lakh crore in 2018-19. In the latest Budget, though, the government has pegged it at Rs 4.44 lakh crore. Of course, the centre had earlier this fiscal announced its intent to to progressively cut the EBRs.

Chakraborty said the borrowing in the second half would be spread over 17 weekly auctions of Rs 16,000 crore each. The last two auctions, however, will be worth Rs 14,000 crore each. Floating rate bonds to the extent of 10% of gross issuances would be flaoted during the year, he added. The borrowings through treasury bills are planned in such a manner that it would result in net outflows of Rs 20,000 crore during the third quarter of the fiscal. Switching of government securities would continue while buyback of securities will also be performed in the second half, the secretary added.

Aditi Nayar, principal economist at Icra, said: “The extent of the shortfall in the government’s tax revenues relative to the budget estimate for FY20 would become clearer by the end of the third quarter, both in terms of corporate tax revenues as well as the GST collections. Additionally, the funds collected through the National Small Savings Fund and the size of the planned sovereign bond issuance would guide whether additional domestic dated securities need to be issued in Q4 FY20.”

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