The Government Has A Redemption Headache Coming Up

The Indian government’s gross borrowings are likely to remain high over the next couple of years as the amount of sovereign debt maturing is set to rise significantly between 2019-20 and 2022-23.

While the government will have no trouble in refinancing this debt since this is all domestic debt, the increased fresh borrowings could mean pressure on bond yields. Over the last two years, the government tried to spread out the upcoming redemption pressure by ‘switching’ existing bonds with longer tenor securities. This, however, has seen limited success.

According to the ‘Medium Term Fiscal Policy Statement’ released as part of the interim budget, the government said it had budgeted for repayments of Rs 2,36,878 crore in 2019-20. This redemption pressure is one reason why gross borrowings in FY20 are pegged at more than Rs 7 lakh crore, even though net borrowings are broadly stable.

The status paper on government debt released in January shows that the redemption pressure will continue to rise over the next few years, peaking at about 7.76 percent of the outstanding stock of government debt in 2022-23. The data for 2019-20 differs between the status paper and the budget document due to debt buybacks and debt-switches executed during the year.

To be sure, the government has been working to elongate the maturity profile of its debt portfolio to reduce the rollover risk.

The paper said the average residual maturity of outstanding government debt stood at 10.6 years as of March 2018. This indicates a relatively lower rollover risk in medium term.