Government borrowings: Change in plan to impact bond yields

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New Delhi | Updated: December 28, 2017 5:36:00 AM

Centre to borrow an extra Rs 50,000 cr through dated securities in FY18; on fiscal slippage, jury still out

Government borrowings, cash, money, bond yeilds, Kotak AMCThe 10-year benchmark yield closed at 7.22% on Wednesday, six basis down from Tuesday’s closing of 7.28%, which was at a 17-month high.

The government has decided to borrow an additional Rs 50,000 crore through dated securities this fiscal while trimming receipts via treasury bills by Rs 61,203 crore between now and March 2018, the finance ministry said on Wednesday, stoking concerns about a flare-up of bond yields. Bond dealers said the additional market borrowing via long-term securities is almost double the market expectations, which could trigger some knee-jerk reaction on yields on Thursday.

Analysts said the move suggests a growing preference for a long-term maturity profile for government securities rather than a short-term one. While the threat of a breach in the fiscal deficit target of 3.2% of GDP for FY18 looms large amid a potential revenue shortfall due to the goods and services tax and an economic slowdown, the latest move, per se, doesn’t suggest a slippage at this stage. This is because the interest burden on dated securities won’t be borne this fiscal. The finance ministry also said there won’t be any net additional borrowing between now and March 2018. Also, any fiscal slippage may be funded through higher-than-budgeted small savings collections, said the analysts. Separately, the government late on Wednesday cut by 20 basis points interest rates on various small savings schemes like Public Provident Fund, Kisan Vikas Patra and National Savings Certificate for January-March 2018. This will reduce the government’s interest outgo on these schemes.

The 10-year benchmark yield closed at 7.22% on Wednesday, six basis down from Tuesday’s closing of 7.28%, which was at a 17-month high. The rally on Wednesday was due to the expectation that the additional borrowing would be close to the Rs 25,000-crore mark. Lakshmi Iyer, chief investment officer (debt) at Kotak AMC, said, “The figure of Rs 50,000 crore is higher than the expectations and we will see the yield go higher by at least 5-6 basis points to 7.28% levels on Thursday.”

Over the last few weeks, the bond market witnessed high volatility over the lack of clarity on how much additional borrowing would be done by the government. The benchmark yield fluctuated 10 basis points in a session for at least two days last week.

The government had budgeted gross and net market borrowing at Rs 5,80,000 crore and Rs 4,23,226 crore, respectively, with Rs 3,48,226 crore being raised (net) from dated government securities and Rs 2,002 crore from T-bills. Gross and net market borrowings until December 26 are Rs 5,21,000 crore and Rs 3,81,281 crore, excluding buyback/switches, respectively. As against the budgeted net T-bills receipt of Rs 2,002 crore in FY18, net collections until December 26 were, however, as much as Rs 86,203 crore.

The Centre’s fiscal deficit in the April-October period of the current fiscal touched Rs 5.25 lakh crore, or 96.1% of the budgeted target for the current fiscal. While a front-loading of allocation was done in the wake of an advancement of the Budget date by a month, the high deficit level poses risks to the fiscal maths in view of a sequential fall in GST collections and economic growth below par despite a sequential rise of GDP growth by 60 basis points in Q2FY18 to 6.3% from a three-year low in the previous quarter.

The NK Singh-led FRBM panel has suggested the Centre aim for a fiscal deficit of 3% of the GDP for three straight years starting this fiscal and reduce it to 2.5% by 2022-23. However, it has recommended an escape clause to go up to a slippage of 0.5 percentage point in exceptional circumstances. The government has been aiming at meeting the 3% deficit target by only next fiscal.

A likely shortfall of Rs 40,000 crore in non-tax revenues due to a mismatch between budgeted goals and receipts of dividends from the Reserve Bank of India and spectrum sales, and potential revenue loss of Rs 13,000 crore following a cut in central excise on diesel and petrol are expected to weigh on the government’s calculations. There is considerable uncertainty over whether the GST is indeed going to be revenue-neutral this year (also, only eight months GST collections will be factored in in FY18 despite that by the end of March, the new tax will have completed nine months), although tax collections so far are broadly in step with budgeted targets.

Fortunately for the government, its disinvestment proceeds may reach around Rs 1 lakh crore, higher than the target of Rs 72,500 crore.

The RBI at its bimonthly monetary policy review on December 6 had cautioned that farm loan waivers by select states, partial roll-back of excise duty and value-added tax in the case of petroleum products, along with a decrease in revenue on account of reduction in GST rates for several goods and services may result in fiscal slippage with attendant implications for inflation. While the liberal GST rate reductions have also been influenced by electoral considerations in the run-up to Gujarat polls, there is a feeling in the government that the rate cuts might have been overdone.

Aditi Nayar, principal economist at Icra, points out that while the upward revision in the government’s dated issuance calendar for January-February 2018 is being offset by the reduction in the planned T-bills issuance, concerns regarding a mild fiscal slippage persist on account of the sequential dip in GST collections for November 2017.

But she said the latest changes in the long-term (market borrowings) and short-term (T-bills) issuance calendars neither confirm nor rule out a fiscal slippage in FY18. “A fiscal slippage, if any, may get funded through higher than budgeted small savings collections.

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