The Centre on Friday sought to calm the bond market by announcing that it will trim its gross market borrowing for the second half of FY19 by Rs 70,000 crore, taking the borrowing for the full year to Rs 5.35 lakh crore against the budgeted Rs 6.05 lakh crore. Instead, it will reduce buybacks and tap the National Small Savings Fund more aggressively to finance fiscal deficit, economic affairs secretary Subhash Chandra Garg said.
Some analysts expect the move to have a marginal positive impact on the bond market that has been on fire this year. The yield on benchmark 10-year G-secs could remain in the 8-8.1% range in the short term, they said. The yield settled at 8.02% on Friday, having shot up as much as 70 basis points in 2018 and dealing a deadly blow to banks’ profitability that had held almost 42% of outstanding government securities by June.
However, given that the government may resort to undeclared extra-budgetary resources (EBRs) to fund spending (a recent FE analysis suggests the Centre plans to raise an additional Rs 37,000 crore via EBR in FY19 to finance education infrastructure and Swachh Bharat mission alone), the actual impact of the government’s market borrowing remains hazy, said some analysts. Also, many remained concerned over the sticky oil prices that could inflate the fuel subsidy (FE has estimated that if the crude prices and the rupee remain around the current level for the rest of the fiscal, the subsidy requirement would increase by over Rs 12,000 crore or 50%).
Garg said on Friday the Centre would borrow Rs 2.47 lakh crore in the second half of this fiscal, against Rs 2.88 lakh crore in H1. However, net borrowing will remain unchanged at Rs 3.9 lakh crore in FY19 (Rs 2 lakh crore in H1 and Rs 1.9 lakh crore in H2). “Revenue mop-up will be as per budget estimates. As for expenditure, even after factoring in (spending due to) the minimum support price programme and Ayushman Bharat, we believe expenditure will be on track and there is no need to revise fiscal deficit target from the budgeted 3.3% for FY19,” Garg said.
This means if the government sticks to its commitment of meeting the fiscal deficit target, it will have to shun populist misadventures in the build-up to the 2019 general elections unless it resorts to spending cuts or raise funds via EBR.
While Garg didn’t spell out details of the funds to be mopped up through small savings schemes or the extent of a cut in buybacks, sources said the central government could borrow Rs 50,000 crore more from the NSSF, against the budgetted Rs 75,000 crore, and also reduce buyback by at least Rs 25,000 crore in 2018-19 from the budgeted Rs 71,941 crore. The Centre had borrowed almost Rs 6 lakh crore in 2017-18, higher than the budget estimate of Rs 5.8 lakh crore.
The revision in the borrowing schedule, Garg told a TV channel later, would have a positive effect on the market (the government has been concerned since bond yields crossed 8%) but since the net borrowings are unchanged, it won’s have any adverse impact on the financing of fiscal deficit. While maintaining that tax collections in aggregate would be on target, Garg asserted that capital expenditure won’t be reduced from the budgeted level of Rs 3 lakh crore. “About 44% of the capex budget has already been spent,” he said. While a “hump’ (accumulated redumption pressure) is seen in 2020-2021, the government could still manage with buybacks “much much lesser”, the secretary said
The economic affairs secretary also said the retail inflation-indexed bonds will be rolled out in the second half of this fiscal. Along with the floating rate bonds, these could account for up to 10% of the total bond issuance.
Aditi Nayar, principal economist at Icra, said: “The market would continue to monitor the likelihood of meeting the budgeted targets for revenues related to the GST, dividends and profits, and disinvestment, and assess whether the outlays required for revised MSPs, the NHPS, fuel and other subsidies, and bank recapitalisation would prove to be adequate.”
The Centre also decided to change the mix of the tenure of securities, opting for more long-term (20 years-plus) papers. Earlier this fiscal, it had introduced bonds with a tenure of 1-4 years as well, which will continue. This eased pressure on the 5-9-year segment “which was finding difficulty in sailing through over the last few months”.
There will be a total of 21 issuances of bonds in the October-March period, Garg said. The size of each issue will be Rs 11,000 crore until the beginning of November, after which it will be raised to Rs 12,000 crore until March 8, 2019, Garg added.
Bonds have fallen to their lowest in four years while the rupee has emerged as the worst performer in Asia, having lost around 13% in 2018 amid an emerging market rout on concerns over global trade wars, elevated crude oil prices and likely rate hikes by the US Federal Reserve.
Earlier this month, the yield on 10-year bond hit 8.23%, the highest since November 14, 2014, while the domestic currency dropped to a record low of 72.99 (intra-day) to the dollar on September 18.