Govt sticks to FY18 borrowing plan
Fiscal deficit target stays unchanged ‘as of now’; majority of borrowing likely to be completed by December
MUMBAI: The government will raise ₹2.08 lakh crore through market borrowings in the second half of the current fiscal year, sticking to its budget, but does not rule out the possibility of selling more bonds for additional spending.
A majority of the borrowing would be completed by December, economic affairs secretary Subhash Chandra Garg said in a press briefing on Thursday. According to the calendar released by the Reserve Bank of India (RBI), the government will raise ₹1.65 lakh crore by the end of December.
Garg said the need for additional borrowing would be assessed in December once the supplementary demand for grants is placed in Parliament. He said the government was sticking to the fiscal deficit target of 3.2% of gross domestic product “as of now”. With economic growth sagging to a three-year low of 5.7% in the June quarter, debate about the merits of a fiscal stimulus package has taken centre stage. In the 2017-18 Union budget, the government pegged its aggregate gross market borrowing at ₹5.8 lakh crore.
It had front-loaded borrowings in the first half of the fiscal year, when it raised ₹3.72 lakh crore. However, expenses have also been front-loaded. The fiscal deficit reached ₹5.05 lakh crore for April-July, or 92.4% of the budgeted target for the current financial year, meaning there is little elbow room left for the government to boost spending without breaching the target.
According to Rupa Rege Nitsure, group chief economist at L&T Financial Services, by sticking to the borrowing numbers, the government has sent a positive signal and avoided negative implications for sovereign ratings.
“By December, they will have a better view of the revenue shortfall because currently there are still some problems with GST (goods and services tax). Going by the budgeted number would also ensure that bond yields don’t harden further and help contain borrowing cost,” Nitsure said.
“They have not just stuck to the fiscal deficit target but also raised the limits of foreign portfolio investment in government securities and state development loans. This, too, will add to the positive sentiment. Increased FII (foreign institutional investor) interest and lesser hardening of interest rates will be positive for equities also. And any upside in stock prices will be supportive of their divestment programme,” Nitsure said.
On Thursday, RBI also notified that the limits for foreign portfolio investors for October-December were increased by ₹8,000 crore for government securities and ₹6,200 crore for state development loans.
So far this year, FIIs have bought $20.26 billion of debt, one of the key factors that pushed bond yields lower. However, the trend reversed in the recent past with talk of a fiscal stimulus.
On July 24, yield on the 10-year benchmark government bond closed at 6.41%, the lowest in this fiscal. Since then, yields have risen 23 basis points to 6.64% at the close on Thursday. One basis point is 0.01%.
Ajay Manglunia, executive vice-president and head of fixed income at Edelweiss Financial Services, expects yield on the 10-year paper to move in a band of 6.55-6.75% in the near term.
He said bond yields will be influenced by factors such as demand-supply dynamics and global developments, especially related to central banks, and the market will watch out for cues which may indicate that the government will likely step up spending and deviate from the path of fiscal consolidation.
The borrowing programme, which is spread across 17 weekly auctions of government bonds, ends on February 9, according to the RBI calendar.