The decision to trim the additional borrowing comes a day after the bond market saw a sharp sell-off led by Reserve Bank of India (RBI) deputy governor Viral Acharya’s comments that the interest rate risk of banks could not be managed over and over again by the regulator.
After selling off sharply on Tuesday, bonds rallied on Wednesday after the government said it would borrow only an additional Rs 20,000 crore and not Rs 50,000 crore in 2017-18. Economic affairs secretary Subhash Chandra Garg said in a tweet: “Government has reassessed additional borrowing requirements taking note of revenue receipts and expenditure pattern. Requirement of additional borrowing being reduced from Rs 50,000 crore as notified earlier to Rs 20,000 crore.” The bond markets may have rallied but the lower borrowings have been interpreted as a sign the government will scale back spending in Q4FY18. Garg, however, didn’t elaborate on whether the reduction in the additional borrowing was due to any spending cuts or a likely jump in revenue mop-up, or if the government would tap the short-term Treasury-bill window more aggressively to fund fiscal deficit.
The yield on the new benchmark fell all the way to 7.205% before closing the session at 7.22%, 16 basis points down over Tuesday’s close. The yield on old benchmark hit a low of 7.35% before closing the session 13 basis points down at 7.42% — the lowest in a week. Later in a statement, the finance ministry said the government did not accept borrowings of Rs 15,000 crore in the last three auctions. The remaining Rs 15,000 crore, it said, would be cut in the coming weeks from the borrowing programme notified earlier. The central bank has, in the past one month, twice deferred a part of the bond auctions. In late December, it did not accept any bids for two sets of gilts worth Rs 11,000 crore; only Rs 4,000 crore of supply hit the market. In the first week of January, the RBI did not accept bids for two long-dated papers worth Rs 4,000 crore.
The decision to trim the additional borrowing comes a day after the bond market saw a sharp sell-off led by Reserve Bank of India (RBI) deputy governor Viral Acharya’s comments that the interest rate risk of banks could not be managed over and over again by the regulator. Acharya had asserted that the trend of regular use of ex post regulatory dispensation to ease the interest rate risk of banks was not desirable from the point of view of efficient price discovery in the G-Sec market and effective market discipline on the G-Sec issuer. “It also does not augur well for developing a sound risk management culture at banks,” the DG had observed. Late last month, the government announced higher-than-expected extra borrowings of Rs 50,000 crore through dated securities, while trimming receipts via Treasury-Bills by Rs 61,203 crore until March 2018. This had stoked concerns that the government might be preparing for a fiscal deficit of 3.5% of GDP, against the targetted 3.2% for 2017-18, due to faltering GST collections and a broader economic slowdown. Bonds had witnessed a sell-off led by the news. Badrish Kulhalli, head – fixed income at HDFC Standard Life Insurance Company, points out that with the announcement of the borrowing cut by the government, the market has found solace from two developments. “The problem of immediate supply overhang in the market has reduced. Moreover, the fears of a higher fiscal deficit have also been tempered. I expect the benchmark yield to trade in the range of 7.20-7.30% till the announcement of the budget,” he said.