The additional borrowing of Rs 50,000 crore by the government may defer lending rate cuts in the next year, says a report. Not only will the rate cut be delayed, bonds yields will also rise, Bank of America Merrill Lynch said in a research note. “We thought that the government’s decision to borrow another Rs 500 billion/0.3 percent of GDP was an avoidable negative surprise in an already nervous G-sec market,” said the report. It further said notwithstanding bank recapitalisation, the sell-off in G-secs is delaying lending rate cuts and pushing back recovery.
As the Goods and Service Tax (GST) collections continue to fall after a massive rationalisation, the government has announced an additional borrowing of Rs 50,000 crore via gilts, which is double the amount that was estimated by the market. The government will borrow Rs 50,000 crore extra via gilts between January and March. The government had borrowed Rs 3.72 lakh crore in the first half of the fiscal year 2017-18 and had pegged Rs 2.08 lakh crore for the second half.
“While we did not expect any breach in the FY2017-18 fiscal deficit target, we will wait for clarity about whether this additional borrowing will make up for revenue shortfalls or fund relaxation of the 3.2 percent of GDP FY18 fiscal deficit target,” the report noted. The government had pegged the fiscal deficit at 3.2 percent of the GDP for the current financial year. Additional borrowing by the government may have an impact on the fiscal math. Since revenue collections from the Goods and Services Tax (GST) are slightly lower than the expected in the last two months, the additional borrowing would help bridge the shortfall. BofAML expects Budget 2018 should see hikes in rural public spend; incentives for housing; and the IT exemption limit in the run up to the summer 2019 polls as well as 1 percent cut in the corporate tax rate.
With PTI inputs