Bond market braces for extra borrowing

The bond market is quite sure the government will have to come to it for borrowing more, to bridge the fiscal deficit target gap.


The target is 3.2 per cent of gross domestic product and doesn’t look achievable — the government is undershooting its revenue and tax targets.


It is yet to auction telecom spectrum and the chance of this happening is waning. The year’s disinvestment target of Rs 73,000 crore is also tough. 


The direct tax collection target of about Rs 10 lakh crore could be met. But early indications show glitches in the goods and services tax (GST), and a cut in excise duty for oil could lead to a shortfall in the indirect tax collection.


Source: RBI; Compiled by BS Research Bureau
With a slowing economy and because of bad debt-induced losses in banks, the government’s dividend target could also fall short. The Reserve Bank of India’s (RBI’s) dividend to the government has already halved to Rs 30,659 crore. The government had budgeted Rs 74,901 crore as dividend from RBI and nationalised banks. That target is surely not going to be met.


And, bond traders are saying the small savings target of Rs 1 lakh crore-plus could be uphill, with falling interest rates. They say the government might have mobilised Rs 40,000 crore through small savings in the first five months but the rest of the target would be ambitious.


“While spending by the government is the need of the hour, to match the fiscal deficit target with lower-than-expected nominal GDP requires reduction in absolute fiscal deficit numbers,” said Soumyajit Niyogi, associate director at India Ratings and Research.


Bond dealers expect small saving mobilisation of Rs 75-80,000 crore for the full financial year. If that happens, and if the government falls short of its other targets, it would have to come to the market to borrow.


Interestingly, the last five weekly auctions scheduled for this financial year, from January 8 to February 9, have sizes of only Rs 5,000 crore, against the average weekly auction size of Rs 15,000 crore. The intention could be to ease things for investors, as state governments have flooded the market with their bonds. However, it could also well be that those weekly borrowing sizes be scaled up to the normal Rs 15,000 crore each.


According to sources, RBI officials in their recent meetings with primary dealers and bank treasury heads have been trying to gauge the market’s appetite for extra borrowing.


“These are all regular meetings and RBI officials don’t give a direct hint of any extra borrowing but they try to get a feel about the appetite and sentiment. You can sense extra borrowing is coming,” said a dealer who was present.


Estimates of extra borrowing vary from Rs 30,000 crore to as high as Rs 75,000 crore.


From its early September level of 6.5 per cent, the 10-year bond yields have already moved up to 6.73 per cent, as on Friday’s closing. These could move to as much as 7.1-7.15 per cent by March if extra borrowing is announced, say dealers.


“The policy announcement that state loan auctions would be conducted on a weekly basis and not fortnightly is not a good indication. Earlier, government bond auctions used to happen fortnightly. They brought it to weekly auctions as issuance ballooned. The same could be the situation with state loans,” said a senior bond trader with a primary dealer, who did not wish to be named.


States borrowed about Rs 1.3 lakh crore in the third quarter of the financial year. The market now expects them to borrow between Rs 1.7 lakh crore ando Rs 1.8 lakh crore in the fourth quarter. Overall, state government borrowing could cross Rs 5.5 lakh crore in the full year, almost at par with the central government’s 5.8 lakh crore.


The government also said in the Union Budget that it would be buying back Rs 75,000 crore of bonds in the year. Any communication on this is expected only after December but dealers don’t expect the full buyback to take place, as that would eventually have to be supported by extra borrowing.

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