Bowing to bond market, govt to borrow less in H1

Centre to raise 48% of budgeted amount in first 6 months of FY19

MUMBAI/NEW DELHI: The government chose to borrow a smaller portion of its annual target in the first half of the next fiscal year, departing from its usual practice, amid rising yields and diminishing demand for government securities.

It also expects to borrow around ₹50,000 crore less than its ₹6.05 lakh crore market borrowing plan announced in the budget for the year starting April 1 by reducing bond buybacks and increasing its borrowing from the National Small Savings Fund.

On Monday, the government said that it will raise ₹2.88 lakh crore by selling bonds in the six months to September 30, about 47% of its budgeted amount for the full fiscal year. This is the lowest first-half borrowing in the last 10 years in percentage terms, according to State Bank of India research. Typically, at least 60% of the borrowing is completed in the first half. This is because of deposit mobilisation is usually higher in this period, while credit demand is low.

The lower first-half target for the year starting April 1 is expected to give some relief to bond investors and help the government lower its borrowing costs. Bond yields have surged almost 100 basis points over the last six months owing to expectations of rise in interest rates folIn

widening of the current account deficit, the reduction in banking system liquidity and prospects of faster rate hikes in the US.

Lower participation by staterun banks, the largest customers for government papers, has also added to rising yields. Commercial banks hold 30% of their deposits in government paper despite regulatory rules mandating only 19.5% currently. On Monday, the 10-year yield closed

at 7.608%, up from its previous close of 7.557%.

“The lower supply of securities, along with issuance of floating rate bonds (FRBs) and reduction in share of 10-14 year maturity bonds to 29% from 50% previously, should be positive for the market. However, some of the near-term risks are pushed forward with backloading of the borrowing programme,” said A. Prasanna, chief economist at ICICI Securities Primary Dealership.

the year ending March 31, the government had planned borrowed ₹3.73 lakh crore in the fiscal first half.

For fiscal 2019, the total gross borrowings through government securities is budgeted at ₹6.05 lakh crore, higher than previous year’s revised estimated of ₹5.99 lakh crore.

According to a finance ministry statement, the government also plans to issue more FRBs and introduce retail inflation-linked bonds. The issuance of these securities put together would be 10% of the total gross borrowings.

Bond dealers, who met finance ministry officials last week, had pitched for more FRBs as they tend to have lower risks as their interest rate is reset every six months and helps minimise risk of fluctuating rates in the market.

The government also said that it intends to use larger inflows from small savings schemes to fund its fiscal deficit. Accordingly, it will borrow ₹1 lakh crore from the National Small Savings Fund as against the budgeted amount of ₹75,000 crore.

“With this borrowing programme, we are absolutely confident we will be able to meet all the expenditure requirements of the government without getting into an overdraft situation. We have one more instrument available to us in the cash management bills of ₹1 lakh crore which we will use,” said Subhash Chandra Garg, economic affairs secretary in the finance ministry.