From the perspective of improving demand-supply dynamics in the government bond market, the Rs 10,000 crore reduction in the Centre’s borrowing for the current financial year barely scratches the surface.
What the Centre’s move does do, however, is send out a rare signal of assurance about its fiscal position, despite the government having taken on a significantly larger subsidy load and reduced taxes on certain fuels this fiscal.
The message to the sovereign bond market is that it can rest easy and for once safely do away with the niggling fear of additional market borrowing – and extra supply – that typically starts to build up around the end of December when the government takes stock of its finances for the year.
Following consultation with its debt manager, the Reserve Bank of India, the government last week released the market borrowing programme for October-March. According to the calendar of borrowing, the Centre is slated to sell government bonds worth a total of Rs 5.92 trillion in the last six months of the financial year, including Rs 16,000 crore of green bonds.
The government was originally slated to raise Rs 14.3 trillion through the issuance of bonds in 2022-23 (April-March). However, on Thursday the Centre said its debt issuances will stand at Rs 14.2 trillion.
Given that the size of weekly primary auctions is about Rs 30,000 crore, the cut in borrowing is of too little a magnitude to move the needle as far as easing bond supply is concerned. This is evidenced by the fact that government bond yields did not ease following the announcement of the calendar.
But matters could have been a lot worse for the market. With the RBI’s focus on withdrawal of accommodation making it difficult for the central bank to buy bonds and pick up some of the market’s supply burden, it would be imperative for the government to put to rest any concerns of additional borrowing.
It has done so by opting for the cut in borrowing, even though the reduction is small.
In previous years, just the concern of extra borrowing had led to a steady rise in government bond yields much before the actual event occurred later in the year.
The announcements of extra borrowing have always led to a sharp rise in bond yields and much attendant volatility in the sovereign debt market. Sovereign bond yields serve as the benchmarks for borrowing costs across the economy.
So far in the current year, the government and the RBI have successfully ensured the smooth passage of what is a record-high borrowing programme, despite many misgivings when the Centre shocked the market with its huge bond sale plan during the Budget.
The government has essentially communicated to the market that even if it were to face fiscal stress later in the year, it will resort to means other than borrowing to tide over the situation.
“The marginally lower g-sec borrowing implies greater reliance on other sources of funding such as small savings and/or drawdown of government cash balances. Small savings (securities against small savings + NSSF) is tracking higher than last year at Rs 1.2 trillion over April to July, which is 28.7 per cent of FY23 target levels,” economists from IDFC First Bank wrote.
Incidentally, the government increased interest rates for small savings schemes last week.
The government’s finances for the current year provide a mixed picture so far. On the one hand, tax collections have far outstripped the modest assumptions made in the Budget, which had pegged the growth in the Centre’s gross tax collections this year at 9.6 per cent over the previous year.
With monthly GST collections in September having topped Rs 1.4 trillion for the seventh straight month and for eight months in all this year, the Centre is likely to see total revenue receipts far surpassing Budget estimates. YES Bank’s economists expect the direct and indirect tax collections to exceed by Rs 2 trillion and Rs 80,000 crore, respectively.
On the other hand, the extension of the free food grain scheme announced during the Covid crisis, higher food, fuel and fertiliser subsidies and reduction in oil excise duty are sources of stress to the government’s finances. Analysts, however, expect the government to meet the Budgeted fiscal deficit target.
“While there could be various pressures on the fiscal going forward, for now we anticipate the GFD/GDP to be at the budgeted 6.4 per cent, even as the absolute GFD could be higher by Rs 800 billion (Rs 80,000 crore) — nominal GDP assumed at 17.5 per cent compared to the BE of 11.2 per cent,” YES Bank’s economists wrote.
The lack of unpleasant surprises on the borrowing calendar notwithstanding, absorbing bond supply in the second half of the year may not be entirely smooth, especially as no announcements have been made regarding global index inclusion.
With state governments likely to borrow more than double the Rs 2 trillion that they did in April-September, bond supply pressures remain elevated. Moreover, the progressive shrinking of banking system liquidity and the likelihood of more rate hikes by the RBI point towards higher funding costs in money markets.
“..We continue to see the 10Y g-sec yield in the 7.2-7.6 per cent range in the remainder of FY23,” QuantEco Research wrote. The firm expects a 35-bps hike by the RBI in December, which would take the total tally of rate hikes in 2022 to 225 bps.
“Overall, we see upside risks to the 10-year G-sec yields sustaining and anticipate a 7.50-7.75 per cent by end-March 2023,” YES Bank wrote. Yield on the 10-year bond settled at 7.39 per cent on Friday.