Bond dealers not sure of government's Rs 12-trillion borrowing plan

Illustration: Binay Sinha
The bond market is not sure if the government would be able to keep its borrowing target intact at Rs 12 trillion, especially if there is a fiscal stimulus down the line, but that extra borrowing could still be achieved silently without facing an announcement effect.


Tarun Bajaj, secretary of the department of economic affairs (DEA), had said on Wednesday the second half borrowing programme would remain unchanged at Rs 4.34 trillion.


“The borrowing in the first half is more than what we did in the same period last year. For the second half, we planned our resources and expenditure accordingly. Even if there are ugly surprises, we are prepared,” Bajaj had said in his interaction with the media. 


The basic premise is that with the economy opening up and with careful expenditure management, the borrowing could be kept within the announced limit. More importantly, according to Bajaj, extra borrowing won’t be needed even if there is a fiscal stimulus. 


Some senior bond experts do agree with Bajaj’s view though. For example, Jayesh Mehta, head of treasury of Bank of America, said he believed the government won’t breach its borrowing numbers. 


But other economists and bond dealers are a little skeptical. The revenue shortfall of the government is about Rs 7 trillion so far, while in the second half, the government plans to borrow Rs 4.34 trillion.


Economists say even with aggressive expenditure management, this gap is hard to be bridged in a stress year where revenue generation would be less than what it would be in a normal year. 


Therefore, there could be excess borrowing of at least Rs 1.5-2 trillion in the coming days, say most in the bond markets.


“The Rs 12 trillion is not a believable number. How much extra they will borrow is anybody’s call. It may happen towards February or March. With so much of tax shortfall, disinvestment not happening and the relief measures, the government will have to borrow more,” said Joydeep Sen, consultant, fixed income, for Philip Capital. 


But the government can still borrow extra, without stirring the market.


In the first half of the fiscal year, it has borrowed Rs 66,000 crore extra exercising greenshoe option. This is because the average yield of the borrowing for the government was just 5.82 per cent. The advantage of such borrowing is that the markets don’t get spooked with higher auction numbers, which could impact their bidding pattern, whereas, the government can easily utilise the extra bids received for the base issue size. 


The same tactics can very well be used in the second half, say bond dealers. 


Besides, the government can simply utilise the short-term treasury bill route to borrow anything it wants. With abundant liquidity, and demand for short-term bills being high, the government can utilise this avenue and push the redemption to the next year.


For some reasons, the treasury bill borrowing numbers have been kept low, noted State Bank of India’s group chief economist Soumya Kanti Ghosh. 


The borrowing through treasury bills in gross for the third quarter ending December 2020 is Rs 2.08 trillion, compared to Rs 2.14 trillion in the year-ago quarter. However, treasury bill issuance was Rs 4.55 trillion in the second quarter of the current fiscal year and Rs 5 trillion in the first quarter.


“This clearly indicates that the government is keeping its options open through larger borrowing through short-term bills in Q4. The government is perhaps working with the assumption that the collapse in government revenue is short-term/ automatic stabiliser because of the pandemic and hence it is better to meet it with short-term borrowings,” Ghosh said.


“However, this assumption might be fraught with difficulties if recovery gets stretched further,” Ghosh said.

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