Indian national flags fly outside the North Block of the Central Secretariat buildings, which houses the Ministries of Finance and Home Affairs, in New Delhi, India. (Photographer: Anindito Mukherjee/Bloomberg)

Government Cuts Planned Borrowings As It Seeks To Keep Markets Calm

The government on Friday said that it would borrow lesser than earlier planned in the second half of the current financial year, in order to ensure that bond markets remain calm and liquidity remains comfortable. The government also once again assured the markets that it intends to stay within its fiscal deficit target of 3.3 percent set for the current year.

The government intends to borrow Rs 2.47 lakh crore from the markets in the October-March period. This compares to Rs 2.88 lakh crore in the first half. Based on the total budgeted gross borrowing of Rs 6.06 lakh crore, the government would have needed to borrow close to Rs 3.2 lakh crore.

The borrowing program will mean an average weekly borrowing amount of Rs 11,000 crore spread across 21 auctions.

The planned borrowings are being reduced by bringing down the planned buyback and also an intention to borrow more from the small savings account, said Subhash Garg, secretary in the Department of Economic Affairs. In addition, the government may issue inflation-indexed bonds in the second half, said Garg while adding that there is no target for the money that can be raised via these instruments.

Garg added that the government does not expect to borrow using short term instruments like cash management bills. The outstanding amount on treasury bills is expected to be Rs 17,000 crore at the end of the year, said Garg.

The borrowing program for the second half of the year is in line with our expectations, said Aditi Nayar, economist at rating agency ICRA Ltd. Nayar noted that after the recent upward revision in small savings rate, the government may be in a position to borrow more from that pool.

ICRA expects small savings schemes to provide an attractive alternative to bank deposits in the coming months, which should help the Government of India to avail a higher net amount from the National Small Savings Fund, compared to its target of Rs 1 lakh crore in FY2019.
Aditi Nayar, Economist, ICRA

Following the announcement, Nayar expects the 10-year bond yield to trade between 8.0-8.1 percent in the near term. The yield closed at 8.02 percent on Friday.

Bond markets have been nervous about how government finances will shape up in the second half of the year.

The Fiscal deficit—the gap between the government’s revenue and expenditure—stood at Rs 5.91 lakh crore at the end of August, according to the data released by the Controller General of Accounts. The gap was 94.7 percent of the budgeted estimate of Rs 6.24 lakh crore for 2018-19. It stood at 96.1 percent in August last year.

Since the government is yet to make significant progress on its divestment program for the year and there has been no material pick-up in monthly GST collections, questions on its ability to meet its fiscal targets remain. Last year, the government revised its fiscal deficit target higher to 3.5 percent of GDP.

“The market would continue to monitor the likelihood of meeting the budgeted targets for revenues related to the GST, dividends and profits, and disinvestment, and assess whether the outlays required for revised MSPs, the NHPS (National Health Protection Scheme), fuel and other subsidies, and bank recapitalisation would prove to be adequate,” said Nayar.