Nirmal Bang: Fiscal Rectitude May Cost Growth; Q1 FY21 Record Current Account Surplus

Nirmal Bang Report

The government has kept borrowing for FY21 unchanged at Rs 12 trillion. Given the higher than announced borrowing in H1 FY21, borrowing in H2 FY21 has been cut proportionally and pegged at Rs 4.34 trillion.

Hence, the overall borrowing in H2 FY21 is less than we had anticipated. Borrowing in H2 FY21 stands at around 36% of total borrowing, which is lower than historic levels.

This will provide some near-term relief to yields, but we do not see room for a sharp bond rally, as additional borrowing remains a hanging sword.

Concentration of issuance in the 10-year and 14-year segments will also limit the room for a rally. We expect 10-year yields to remain range-bound around 6%.

The ways and means advances limit for the central government for H2 FY21 has been reduced to Rs 1.25 trillion from Rs 2 trillion in H1 FY21.

We anticipate that the government may need to ramp up spending, which may eventually lead to additional borrowing.

The fiscal deficit for April-August 2020 stood at 109.3% of budget estimate compared to 78.9% a year ago.

The government is curbing expenditure to keep the fiscal deficit in check, which in our view may not be well timed at this juncture, when growth is significantly under pressure.

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