The Indian government will borrow a lower amount via bonds in the first half of the new fiscal year, in order to ease the pressure on the local debt markets. It will also borrow money for a shorter duration than it typically does.
The government plans to borrow Rs 2.88 lakh crore between April-September in FY19 compared to Rs 3.72 lakh crore in the same period of FY18, said Subhash Garg, secretary at the Department of Economic Affairs. There will be 24 issuances of Rs 12,000 crore each in the first half of the financial year, he added.
According to the announced plan, the government will complete 47.56 percent of its the budgeted gross borrowing for the year in the first six months. The government usually tries to complete at least 60 percent of its borrowing requirements in the first six months. The change in the borrowing calendar can be explained by the lack of demand for government paper from banks, which have been hit by mark to market losses on their bond portfolios.
The benchmark 10-year bond yield has risen by close to 100 basis points in FY18 . It closed at 7.62 percent on Monday.
Along with changing the timing of its borrowings, the government has also yielded to the market’s demand for shorter tenure borrowings. The government has introduced issuances in 1-4 year bucket for the financial year 2018-19, Garg told reporters at the media briefing.
The break-up of the borrowings for the April-September period is as follows:
- 8.3 percent of borrowings in 1-4 year bucket
- 25 percent of borrowings in 5-9 year bucket
- 29.2 percent of borrowings in 10-14 year bucket
- 14.6 percent of borrowings in 15-19 year bucket
- 22.9 percent of borrowings in 20+ year bucket
“The borrowing plan is very good news. It’s clear that they have listened to the market,” said R. Sivakumar, head of fixed income at Axis Mutual Fund. Sivakumar added that increased borrowings via shorter duration paper suggests that the government has changed its strategy around refinancing risk. Over the past few years, the government has tried to reduce refinancing risk by increasing the duration of its borrowings. It has done this through switches and buybacks of existing short term bonds.
Lower Gross Borrowings?
The government will reduce the planned amount of buyback of government bonds from the market by Rs 25,000 crore and increase its borrowings from the National Small Savings Fund by Rs 25,000 crore, said Garg. The natural conclusion is that this will reduce gross borrowings, Garg added while declining to specify whether the gross government borrowing for the year will be lower than what was announced at the time of the budget.
Sivakumar added that the reduction in buybacks and increased borrowings from the small savings pool means that gross borrowings for the year will likely be Rs 50,000 crore lower than the budgeted amount.
Finance Minister Arun Jaitley had announced a borrowing target of Rs 6.06 lakh crore in the Union Budget for 2018-19. That was after the government had to increase its planned borrowings in 2017-18. India borrowed Rs 6 lakh crore in 2017-18, which was higher than the Rs 5.8 lakh crore it had planned. Borrowings were increased due to volatility in tax collections following the implementation of the Goods and Services Tax. Jaitley had said that the slippage came as the government collected GST collections for only 11 months. The Indian government will also overshoot its fiscal deficit target of 3.2 percent for 2017-18, with the revised deficit pegged at 3.5 percent.
How Will The Market React?
Bond markets are expected to react positively to the government’s borrowing plan.
Lower borrowings in the first half of the year and more supply of shorter duration paper is positive for the market, said Soumyajit Niyogi, associate director at India Ratings. Niyogi explained that the market has had excess supply of bonds in the 10-year bucket, while demand is higher for bonds in the 1-5 year buckets. So far, about 40-45 percent of central government bonds are of close to 10-year duration and close to 70 percent of state government bonds are of 10-year duration, Niyogi pointed out. However, both banks and FIIs prefer to buy shorter duration bonds, he added.
The reduction in the borrowing amount and the tenure of borrowing follows feedback from market participants.
Last week, finance ministry officials met primary dealers seeking suggestions for the smooth conduct of the borrowing programme. Primary dealers had recommended the issuance of more securities of short tenures to cut mark to market losses of investors, a government official had told reporters then. Market participants have also recommended an increase in the foreign investment limit for government bonds. That decision falls within the mandate of the Reserve Bank of India and is still pending.