Govt borrowing likely to be lower in second half of FY19 than in the first

The Government of India’s (GoI’s) market borrowing in the second half (H2) of 2018-19, against expectations, might be lower than the Rs 2.9 trillion it plans to raise till the end of September.

It is meant to keep the yields on government debt paper low, which should please their buyers like banks and other financial institutions (higher yields happen when there is a greater supply of such paper).

A top government official said this would be made possible by easing the pace of buying back securities — a change from the aggressive stance of previous years. The space created will provide the government an additional cushion of about Rs 225 billion, he reckoned.

“We have used the soft interest rates in previous years to buy back securities. While it will continue, there is no need to frontload those now when the rates have hardened,” the official said.

The impact of this move will be visible in the second half of the borrowing calendar, the official said. This will allow the government to keep the borrowing space free for the higher demand by the state governments. There has been worry in the markets that while the Indian government has surprised on the upside by offering to borrow only 47.5 per cent of its need this year, compared to the nearly 65 per cent share raised in the same period in previous years, the gap would be made good later. 

Source: Public Debt Management Report (GoI)

Icra Principal Economist Aditi Nayyar has warned that the benchmark 10-year G-sec yield could rise to 7.3-7.6 per cent after September once “the size of the borrowing programme that the GoI announces for the second half of 2018-19, along with the evolving assessment about the risks of any fiscal slippage,” becomes clear.

Usually government managers and the Reserve Bank of India (RBI) meet towards the middle of September to decide on the calendar of borrowing for the remaining half of the year. The plans to ease up on buyback have, however, already been communicated by the government to the RBI, which acts as the debt manager for it. 

To complement the slower pace of borrowing, last week the RBI enhanced the limit for foreign investors (foreign portfolio investors, or FPIs) to invest in government and corporate debt paper. The FPI investment limit in central government bonds was raised to 5.5 per cent in 2018-19 from 5 per cent. It would be raised to 6 per cent in 2019-20, according to the notification posted on the central bank’s website. The slower pace of borrowing and additional space for foreign investors has cooled to 7.18 per cent on Friday. The official said he expected, as result of the cumulative policy moves, the yields to move in a narrow band for the rest of the year. 

The slower pace of buyback will also complement the alternative borrowing from the small savings schemes planned by the government to fund its fiscal deficit of 3.5 per cent during the year. A release issued by the finance ministry last month noted it would raise Rs 1 trillion from the small savings fund.