Government cuts borrowing plan for first half FY19; here’s what CARE expects

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Published: March 27, 2018 4:35:27 PM

An increased demand from farmers, industry and retail segment would put liquidity under further pressure as it will compete with government securities, CARE said.

The government on Monday announced a fiscal first-half borrowing plan that is lower the last few years. Bonds worth Rs 2.88 trillion will be issued in the first half of the fiscal year FY19, that stands at 48 percent of the entire borrowing plan, economic affairs secretary Subhash Garg said. First half borrowing stands usually stands at 60 percent to 65 percent of total borrowing. The latest announcement by the government helped in soothing the bond yields. The lower borrowing in the first half will help in cooling down the debt market that is struggling with a selloff in two decades as state-run banks, the largest buyers, stayed away from buying amid expanding treasury losses.

CARE view

Since the government has slashed its borrowing program in the first half of the FY19, an increased amount to the tune of Rs 3.2 lakh crore will be borrowed in the second half assuming the gross borrowing target is adhered to. Assuming a good monsoon, credit demand will pick up in the second half, CARE report said. An increased demand from farmers, industry and retail segment would put liquidity under further pressure as it will compete with government securities, the report said further.

The bond yields are likely to harden up as the advantage that has been secured currently could fall apart in the next few months, the report said. The banks have excess of statutory liquidity ratio (SLR) of nearly 9 percent. Hence, they are properly covered from the regulatory norms, CARE said. However, given the high non performing assets overhand, there may be investors investing in such papers. However, they would continue to face the MTM valuation market risk if bond yields move upwards, the report said. If the capex has to be financed, there has to be a  heightened activity in the corporate market, it said.

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