Government Attempt To Fend Off Debt Repayment Pressure Sees Limited Success

While buybacks were halted due to the government’s strained finances, “debt switches” haven’t seen many takers in a market where the supply of bonds is large and the pool of buyers limited.

In a year when government bond auctions have partially failed a number of times, the rising redemption pressure is an added concern, a Finance Ministry official said, speaking on the condition of anonymity.

In the past two months, the government intended to switch securities worth Rs 40,000 crore maturing over the next one to three years. Of this, it only managed to switch Rs 10,393 crore worth, extending the tenure by 12 to 40 years.

• In April, the government switched seven securities worth Rs 7,093 crore maturing between one and three years and extended the tenure by 14-40 years.
• In May, it managed to switch only two securities of Rs 3,300 crore maturing between one and three years in return for securities maturing in 12 years.
• In 2020-21, the government was able to switch securities worth Rs 1.18 lakh crore against the revised estimate of Rs 1.60 lakh crore. Broadly, the government switched securities maturing within three years with bonds of up to 40-year maturity.

The government offered its floating-rate bonds for “switch auctions” hoping to garner better demand from bond market participants, the finance ministry official quoted above said. But this only helped partially.

This is a worry since the government hasn’t been able to budget for buybacks this year and now switches have faced difficulties, which will increase redemption pressure next year and raise gross borrowings, the official said.

Debt buybacks, which have not taken place since 2017-18, are unlikely to resume due to the strained fiscal position. In years with a high fiscal deficit, there is no question of buybacks of government securities, the official said.

While switches are cash neutral, buybacks involve cash payment.

According to data available on the RBI's website, repayments on government securities due this year are at an estimated Rs 1.59 lakh crore. This jumps sharply to Rs 4.34 lakh crore in FY23 and then remains high in subsequent years.

This will only add to the gross borrowing requirement in the coming years. In the current year, the government will borrow a gross amount of just over Rs 12 lakh crore, accounting for repayments worth Rs 2.81 lakh crore.

The challenge for the government is the fiscal deficit is quite high so the ability to conduct buybacks and switches of securities has come down because market can only absorb so much supply at current level of yields, said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.

According to Upadhyay, the government has to plan ahead to tackle the high redemption pressure for next year.

Maybe, there will be greater demand and participation for switch auctions towards the latter part of the year when the economy improves and if the RBI lets yields rise, he said.

Essentially there is a difference between what the markets want and what the RBI is offering, said Madan Sabnavis, chief economist at CARE Ratings. “This is an issue we are having in the current financial year because the central bank is determined to ensure that yields do not move up because liquidity is being provided to the system,” he said.

Sabnavis sees this problem continuing for at least another three months till the economic situation remains fragile and as long as the RBI stance on yields remains unchanged.