A cashier counts Indian one hundred-rupee banknotes at an Oriental Bank of Commerce branch in New Delhi. (Photographer: Prashanth Vishwanathan/Bloomberg)

Government Cuts Additional Borrowing Plan After Bond Yields Spike

The government intends to cut the additional borrowing in the current fiscal year to Rs 20,000 crore from the earlier notified Rs 50,000 crore, the Ministry of Finance said in a press release today.

The decision was taken after assessing the revenue and expenditure patterns of the government, the government said.

Soon after Bloomberg reported that the cut in additional borrowing was likely prompted by an additional dividend payment from the Reserve Bank of India.

RBI dividend led to cut in additional borrowing: Government official to Bloomberg

The Bloomberg report cited an unidentified finance ministry official who said that the government considered a case for higher dividend from the central bank to decide on lowering its estimate for additional borrowing this fiscal year.

In August 2017 the RBI said it would transfer Rs 30,659 crore to the government in the form of dividend for financial year 2016-17. That is less than in previous years and since then media reports have indicated that the government may seek an additional payment from the RBI, of upto Rs 13,000 crore.

So far RBI has not confirmed the payment of any additional dividend.

The government’s decision to cut borrowings follows a spike in bond yields in response to higher government borrowings. On Dec. 27, the government said it intends to borrow an additional Rs 50,000 crore through dated securities in the current year. This was the first time in six years that a substantial increase in borrowings has been announced mid-year. Following that increase in borrowings, the total government borrowings for the year were pegged at Rs 6.3 lakh crore.

The subsequent cut announced by government officials on Wednesday means that quantum of borrowings for the year comes down to Rs 6 lakh crore.

Bond markets responded sharply to the proposed cut. The 10-year benchmark bond yield dropped as much as 18 basis points moments after the tweet.

This is quite a positive development because the market was weighed down with additional supply of government bonds, Neeraj Gambhir, head of fixed income at Nomura India told BloombergQuint.

I think the whole issue was that market did not have the appetite to absorb this additional supply and given the overall economic environment, given the inflation trajectory and the rising crude oil prices, there wasn’t much appetite.
Neeraj Gambhir, Head Of Fixed Income, Nomura India.
Government Cuts Additional Borrowing Plan After Bond Yields Spike

R Sivakumar, head of fixed income at Axis Mutual Fund said that the government may have had few options but to cut borrowings. He pointed to the fact that two of the last government bond auctions had to be partially cancelled.

You have to remember that two auctions have already been partially cancelled. And that itself is a signal that they are being forced to reduce the borrowing number to adjust to the appetite from the market.
R Sivakumar, Head Of Fixed Income, Axis Mutual Fund

Sivakumar added that the government’s own fiscal math may not have changed but it may have decided to alter the mix of borrowings between shorter term Treasury bills (T-Bills) and longer dated securities.

“Given the amount of liquidity in the system, which is the upcoming maturities of over Rs 1 lakh crore of MSS (market stabilization scheme) bonds, we know that the T-Bills demand should pick over the next few months. And therefore, if they substitute the long bonds with T-Bills, the market should be able to absorb it easily,” Sivakumar told BloombergQuint.

The government’s finances have been impacted by the implementation of the Goods and Services Tax, which has led to some volatility in indirect tax collections. The government has also front-loaded some of its expenditure in the current year. The result has been that the government’s fiscal gap in the April-November period has hit 112 percent of the budgeted target.