Government borrowing cost set to rise

Bond yields surge; implication is a further hardening of interest rates

As bond yields surge on the pressure of rupee depreciation, the cost of market borrowings for the government to finance its fiscal deficit will rise. However, it would not have an impact on the amount of borrowing, Rs 5.79 lakh crore for this financial year, at least as of now. The finance ministry on Tuesday ruled out raising of the borrowing amount for 2013-14, while saying that it is too early to forecast any cut.  

As on August 9, the total of market borrowings of the government was Rs 32,57,611 crore, said Soumya Kanti Ghosh, chief economic advisor in State Bank of India. Between mid-July when the Reserve Bank (RBI) announced raising of short-term interest rates and Monday, the yield on a 10-year paper strengthened by a bit more than one percentage point. That increase would raise the government borrowing cost by Rs 32,576 crore on the outstanding borrowing as on August 9, he said.

The increase in servicing cost is almost 0.3 per cent of gross domestic product (GDP), pegged at Rs 113 lakh crore for 2013-14 in nominal terms. However, the papers would not mature only this year and the figure would rise or decline on a daily basis, depending on the yields.

Since April 1, the yield had risen by a little over two percentage points till this Monday, meaning the borrowing cost this financial year had risen by almost Rs 65,000 crore. It should be noted that the government raised money through different tenures of papers, such as for five years, nine years and even 20 years, so the number is only an indicative figure.

The strengthening of yield, resulting in higher cost borrowing for the government, basically means the interest rate regime will further harden. As of Monday, yield on the long-term 10-year paper was 9.23 per cent; it was a little over 11 per cent on short-term paper of up to a year. Though the yield came down on Tuesday to 8.93 per cent, a section of analysts believe the long-term yield might also align with the 10.25 per cent rate on RBI’s Marginal Standing Facility. In July, RBI had raised this rate by a whopping 300 basis points, to 10.25 per cent.

However, some other analysts said such yields were not sustainable and were bound to witness a correction.

Almost Rs 54,000 crore of various kinds of government paper come up every week on an average, Ghosh said. This includes Rs 15,000 crore of dated securities (market borrowing), Rs 22,000 crore of cash management bills, Rs 12,000 crore of treasury bills, and Rs 5,000 crore of state development loans.

On whether such fund raising would not crowd out resources for the private sector, analysts said the demand for credit was anyway low. More hardening of interest rates would further dampen that demand, they said.   

The government plans to raise Rs 5.79 lakh crore this financial year, 3.8 per cent higher than the Rs 5.58 lakh crore pegged in the revised estimates of 2012-13. Of this, Rs 3.49 lakh crore is slated to be raised in the first six months of 2013-14, almost 60 per cent of the year’s budgeted amount.

The budgeted amount for 2013-14 would not be impacted by the yield strengthening on government paper, as fiscal deficit numbers are a given, a finance ministry official said. The schedule of the borrowing calendar for the second half of the current financial year is slated to be released in a fortnight or so.

Meanwhile, Economic Affairs Secretary Arvind Mayaram said there is no intention of raising the amount of borrowings for this financial year.

The government plans to rein in the fiscal deficit at 4.8 per cent of GDP in the current financial year, against 4.9 per cent in 2012-13.