Gross borrowing pegged at ~7.1 trillion for 2019-20
Gross borrowing for fiscal 2019-20 has been pegged at ~7.1 trillion while net borrowing was at ~4.73 trillion against ~4.22 trillion in the current fiscal year, according to the interim Budget on Friday.
The fiscal deficit for the current fiscal year was pegged at 3.4 per cent of gross domestic product (GDP), which is slightly higher than the 3.3 per cent projected earlier.
In fiscal year 201920 also, the fiscal deficit has been pegged at 3.4 per cent.
Bond dealers said foreign portfolio investors were heavy sellers as they expect pressure on yields to continue in the coming days.
“The market seems to be disappointed that the government is not meeting the fiscal deficit target for yet another year,” said Kumar Sharadindu, managing director (MD) and chief executive officer (CEO), SBI Pension Funds.
This is the fourth consecutive year that the government compromised on fiscal consolidation and the targeted glide path. However, even that is not sure as the revenue projections could be difficult to achieve, said Arvind Chari, head of fixed income at Quantum Advisors.
“We are seeing a very high assumption on tax with GST growth assumed at 18 per cent for FY 20. This will be difficult to achieve as things stand currently. The Budget is inflationary with overall expenditure at 13 per cent along with the new spending on farmer income support,” Chari said.
In 2018-19, the gross borrowing was at ~5.71 trillion, lowered from the initial ~6.05 trillion as the government in September had decided to borrow less. The gross borrowing for 2019-20 is higher, partly taking into account higher redemptions. Still, on a net basis, the borrowing is higher by about ~50,000 crore.
The redemption next fiscal year will be around ~2.37 trillion against ~1.48 trillion in the 2018-19 fiscal year. The government plans to ‘switch’ ~50,000 crore of bonds, which is essentially issuing longer dated securities against securities maturing in the near term.
This transaction typically happens with the Reserve Bank of India (RBI) and does not disturb the market. In the current fiscal, the switch was to the tune of ~28,059 crore.
The bond market was disappointed with the borrowing numbers. Yields on the most traded 9-year bond (which was the benchmark 10-year one till last year) jumped 13 basis points to close at 7.61 per cent while the benchmark 10-year bond yields rose 10 basis points to close at 7.38 per cent. The rupee, however, remained stable and closed at 71.3 a dollar, from its previous close of 71.1 a dollar.
“The borrowing numbers are high no doubt. Therefore, pressure on the RBI to conduct open market operation (OMO) purchases would continue in the next year,” said Sharadindu.
In this fiscal, the RBI plans to buy bonds to the tune of ~2.5 trillion from the secondary market. This has come as a relief for the bond market.
However, the market doubts if that would be the case after the new government assumes office in May.
“At least till elections in May, a stable state would be maintained in the bond market. After that, the next government may have to reduce its spending on infrastructure,” Sharadindu said.
The market doesn’t have a firm view on the yields, and much depends on what the RBI’s stance is regarding OMOs. If the central bank continues to undertake such OMOs as done in the present fiscal year, it can support the bonds.
But if such liquidity operations are not done, more money would definitely be sucked out from the market and yields will shoot up by at least 25 basis points, despite the central bank cutting rates, bond dealers said.
Moreover, the higher borrowing numbers are also overall negative from the treasury risk perspective.
“The borrowing numbers are negative for the market as the supply will be huge. Even as there is set to be higher redemption, duration risk goes up due to higher issuance of bonds maturing in 10 years and above,” said Ramkamal Samanta, vice-president (investment) at Star Union Dai-Ichi Life Insurance.