Govt cuts gross bor­row­ings by ~700 bil­lion

Move may ease bond yields and pres­sure on liq­uid­ity; govt may meet fis­cal deficit tar­get

Business Standard - - FRONT PAGE - ARUP ROYCHOUDHURY & ANUP ROY

Armed with aug­mented re­sources from small sav­ings, the gov­ern­ment will cut gross mar­ket bor­row­ings by ~700 bil­lion for 2018-19 to fi­nance its fis­cal deficit, which is ex­pected to re­main within the tar­geted 3.3 per cent of gross do­mes­tic prod­uct (GDP).

The move, along with mea­sures of the Re­serve Bank of In­dia (RBI), is ex­pected to ease pres­sure on bond yields and liq­uid­ity. For the sec­ond half, the gov­ern­ment will mop up ~2.47 tril­lion as mar­ket bor­row­ings, which will in­clude is­suances of in­fla­tion-linked bonds. While the tar­get of net mar­ket bor­row­ing will be re­tained, that for buy­backs will be re­duced.

Also, small sav­ings will give ad­di­tional re­sources to the gov­ern­ment, af­ter rais­ing in­ter­est rates on them.

“The gross bor­row­ing pro­gramme for the sec­ond half is now only ~2.47 tril­lion. In the first half, our bor­row­ing pro­gramme was ~2.88 tril­lion,” Eco­nomic Af­fairs Sec­re­tary Sub­hash Garg told re­porters af­ter fix­ing the cal­en­dar for the sec­ond half af­ter con­sul­ta­tion with the RBI. The gov­ern­ment had bud­geted mop­ping up ~6.06 tril­lion in FY19, but will now raise ~5.35 tril­lion (~2.88 tril­lion in the first half and ~2.47 tril­lion in the sec­ond half). Re­duced buy­back and in­creased re­sources from small sav­ings will make up for the lower mar­ket bor­row­ing. “Since our fis­cal deficit is not be­ing af­fected, we have de­cided to con­tinue with the net bor­row­ing pro­gramme as it is. How­ever, we had some re-think on the buy­back pro­gramme. Also, we ex­pect some more funds to flow from small sav­ings,” Garg said. Ear­lier, the gov­ern­ment had said it would re­duce buy­back by ~250 bil­lion and raise an ad­di­tional ~250 bil­lion from small sav­ings in FY19. This had been

raised by ~200 bil­lion, for the whole of which the buy­back would be re­duced fur­ther, sources said. Icra Chief Econ­o­mist Aditi Na­yar said the 10-year bond yield was ex­pected to range be­tween 8.0 and 8.1 per cent in the near term. Cur­rently, it is in the range 8.02-8.03 per cent.

“With un­cer­tainty re­gard­ing the size of H2 mar­ket bor­row­ings out of the way, the out­look for in­fla­tion risks such as crude oil prices, ru­pee value, the pipe­line of open mar­ket op­er­a­tions as well as emerg­ing in­for­ma­tion on the bal­ance of var­i­ous fis­cal risks would guide bond yields,” she said. The gov­ern­ment will bor­row ~110 bil­lion a week un­til the start of Novem­ber. “And there­after, we will bor­row ~120 bil­lion as was the case in the first half. We will end the year’s bor­row­ing pro­gramme on March 8,” Garg said.

There will be 21 auc­tions. The gov­ern­ment will in­tro­duce in­fla­tion-in­dexed bonds dur­ing the sec­ond half this year. “Since this is a new in­stru­ment, we ex­pect one or two is­sues to be made in the cur­rent half year,” Garg said. The gov­ern­ment is not look­ing at fi­nanc­ing the fis­cal deficit from any source other than net mar­ket bor­row­ings, buy­backs and small sav­ings. As such, ei­ther there will be no cash man­age­ment bills or they may be for a very short time, Garg said.

“Our bor­row­ing pro­gramme is suf­fi­cient for our fis­cal needs. We also de­cided that ways and means ad­vances would be ~350 bil­lion only in the sec­ond half. And in March, it will be kept only at ~250 bil­lion,” the eco­nomic af­fairs sec­re­tary said.

The bond mar­ket is sur­prised at the cut in bor­row­ing be­cause it was ex­pect­ing a re­duc­tion of ~500 bil­lion for the full year, as an­nounced by Garg in March. “The bor­row­ing num­ber of ~2.47 bil­lion is pos­i­tive. This re­flects the gov­ern­ment’s com­fort with rev­enues,” said Har­i­har Kr­ish­na­murthy, head of trea­sury, First Rand Bank.

Jayesh Me­hta, head of trea­sury, Bank of Amer­ica Merrill Lynch, said the mar­ket would rally on Mon­day but it would also be cau­tious as the RBI mone­tary pol­icy is sched­uled next week. “If the rate hike is only 25 ba­sis points, the mar­ket will be bullish and sus­tain 7.75 per cent,” said Me­hta. The bond mar­ket has not much rea­son to com­plain be­cause the gov­ern­ment is stick­ing to its fis­cal deficit tar­get, and the RBI is in­fus­ing liq­uid­ity of at least ~2 tril­lion into the sys­tem. “The RBI move to ease liq­uid­ity via LCR (liq­uid­ity cov­er­age ra­tio) eas­ing, two suc­ces­sive OMOs, and the re­sump­tion of gov­ern­ment spend­ing have eased mar­ket liq­uid­ity con­sid­er­ably,” Kr­ish­na­murthy said, adding he ex­pected the 10-year bond yields to test and breach of 8 per cent on Mon­day. The 10-year bond yields closed at 8.02 per cent on Fri­day.

The weekly bor­row­ing re­duc­tion of ~110 bil­lion from ~120 bil­lion should be able to bring some cheer in the mar­ket, but this wouldn’t mat­ter in the long term be­cause the cal­en­dar would be stretched. Bor­row­ing in the sec­ond half typ­i­cally ends in Jan­uary. This time bor­row­ing will con­tinue till the first week of March, the cal­en­dar showed. Bond deal­ers say it is un­likely that the in­fla­tion-in­dexed bond, in­tro­duced in the sec­ond half of the fis­cal year, will be ac­cepted widely if the spread is not good enough.

The cen­tral bank aims to keep the con­sumer price-based in­fla­tion rate an­chored around 4 per cent, whereas the three­month trea­sury bill is yield­ing 7.5-7.6 per cent and the 10-year bond yields are quot­ing 8 per cent plus.

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