One of the important steps is the sharp reduction in the borrowing programme for H1. All these initiatives are going to have a positive impact on the market and we might see a reaction of 7-8 basis points tomorrow at the opening of the session itself.”
The Union government will borrow just 47.5% of its budgeted full-year target (gross) through bonds in the first half of 2018-19 — much lower than the 60-65% in the corresponding period over the previous five years — and take more from the National Small Savings Fund (NSSF) to finance the fiscal deficit as it seeks to ease pressure on the bond market that has witnessed a spurt in yield in recent months. Bond market experts termed the decision to cut borrowing in H1 “positive”, adding there would be less pressure on the 10-year segment “which was finding difficulty in sailing through over the last few months”. Some predicted a reaction of 7-8 basis points on Tuesday at the opening of the session itself. With its plan to borrow Rs 25,000 crore more from the NSSF and reduce buyback by Rs 25,000 crore in 2018-19, the government signals its intent to trim its gross market borrowing by Rs 50,000 crore from its full-year budgeted target of Rs 6.06 lakh crore, although the finance ministry didn’t explicitly mention it while announcing the borrowing calendar for the next fiscal on Monday.
Gross market borrowing of the government will now touch Rs 2.88 lakh crore in the April-September period, against Rs 3.72 lakh crore a year earlier, economic affairs secretary Subhash Chandra Garg said. There will be 24 issuances of Rs 12,000 crore each in the first half of the financial year, he added. The net borrowing will be just over Rs 2 lakh crore in the first half of 2018-19, he said. However, with general elections in 2019, analysts say the reduced borrowing in H1FY19 could pave the way for higher borrowing in the second half of the next fiscal to enable the government to speed up spending before the polls. The government is also in talks with the Reserve Bank of India (RBI) to increase in the foreign portfolio investment (FPI) limit to attract more overseas investments in the government securities, Garg said. The government will introduce a new bucket of bonds with duration of one to four years, indicating its willingness to borrow more via short-term securities. It also decided to reduce the issuance of 10- to 14-year bonds from 52.2% in H1FY19 to just 29.2%. The change in the government’s borrowing calendar may have been prompted by the lack of demand for government securities from banks, which have been hurt by mark-to-market losses on their bond portfolios. The benchmark 10-year bond yield has risen by close to 100 basis points this fiscal. It ended at 7.62% on Monday.
Manish Wadhawan, managing director and head of fixed income at global markets, HSBC India, said: “I think it is a very big positive surprise. The government has taken into consideration the pressure on markets for the past three months. One of the important steps is the sharp reduction in the borrowing programme for H1. All these initiatives are going to have a positive impact on the market and we might see a reaction of 7-8 basis points tomorrow at the opening of the session itself.” Vijay Sharma, executive vice-president for fixed income at PNB Gilts, said: “The allocation to small savings scheme has been increased by Rs25,000 crore which will further reduce the pressure from the overall market borrowings. We expect the benchmark yield to fall below 7.50% because of the positive news.”
Preference for shorter-duration securities suggests the government has altered its strategy around refinancing risk. In the past few years, the government has tried to trim refinancing risk by increasing the duration of its borrowings. The economic affairs secretary also said the retail inflation-indexed bonds will be introduced, and along with the floating rate bonds, these could account for up to 10% of the total bond issuance. Finance minister Arun Jaitley had announced a borrowing target of Rs 6.06 lakh crore in the Union Budget for 2018-19. That was after the government had to increase its planned borrowings in 2017-18. India borrowed Rs 6 lakh crore in 2017-18, which was higher than the Rs 5.8 lakh crore it had planned.
Market borrowings were raised due to lower-than-expected revenue mop-up following the implementation of the goods and services tax. Jaitley had made it clear that the slippage in fiscal deficit was because the government mopped up GST for only 11 months in the first year of its launch. The Centre will also exceed its fiscal deficit target of 3.2% for 2017-18, with the revised deficit estimated at 3.5%. For the next fiscal, the deficit is estimated at 3.3%. Last week, in a meeting with the finance ministry, primary bond dealers had suggested the issuance of more securities of short tenures as well as an increase in the foreign investment limit for government bonds. That decision falls within the mandate of the RBI and is still pending. The RBI in December raised the limits for investment by FPIs for the January-March quarter of FY18 by Rs 6,400 crore in central government securities and Rs 5,800 crore in state development loans, taking them to Rs 2,56,400 crore and 3,01,500 crore, respectively, for the entire fiscal.