Long-Tenor Gilts May Hinder Govt Borrowing
The government's borrowing plan of Rs 1,40,000 crore will be affected this fiscal as there are no takers for long-term paper, despite the programme being skewed towards long-tenor gilts of 15-25 years.
As per the indicative calendar issued by the Reserve Bank of India (RBI), of Rs 68,000 crore to be raised during the first half of 2002-03, Rs 38,000 crore will be through papers of 15 years and above.
Banks are not touching papers beyond 5-year maturity, and the onslaught of the gilts scam has put the brakes on market participants following various regulatory directives.
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Insurance companies, despite their requirement for long-term assets to match long-term liabilities, have hardly made their presence felt.
This was reflected in the 50 per cent devolvement of Rs 3,000 crore 20-year paper on the central bank. On May 31, the government privately placed Rs 2,000 crore of 10.18 per cent 2026 paper instead of auctioning it.
P K Gupta, executive director, Corporation Bank, said: "Banks will not touch more than 5-year paper".
In the wholesale debt market, where gilts constituted 94.22 per cent of total trades in April, participation by Indian banks was the highest at 34 odd per cent, while foreign banks accounted for 12.66 per cent. According to the RBI, during the fortnight ended May 17, banks' investment in gilts reduced by Rs 1,896 crore.
The uncertainty surrounding interest rates has affected the demand from insurance companies, which would otherwise have picked up long-term papers.
"In the current environment, it would not be realistic on our part to lock up in 20-year paper unless we are confident on how interest rates will span out," said a senior Life Insurance Corporation of India (LIC) official.
In 2001-02, 60 per cent of LIC's investible funds of Rs 50,000 crore was parked in gilts. In the current fiscal, even as LIC intends to invest more in equities, with its projection of a 40 per cent growth in business, the insurer's requirement for investment in gilts is expected to increase. But it may not be enough to absorb the amount the Centre wishes to mop up through long-term papers.
LIC is a major player in gilts. Of its life fund exceeding Rs 192 lakh crore, around Rs 156 lakh crore is invested in government papers. However, of late, the corporation has been shying away from the market.
IDBI, which is working towards becoming a bank, has indicated that it will be picking up Rs 18,000 crore of gilts to meet its statutory liquidity ratio requirement. But as the plan is to convert into a bank, the institution may not pick up long-tenor papers.
Last year, the government's borrowing was skewed towards long term papers as well. Only 30 per cent of the gross borrowing raised through dated securities was through less than 10-year papers.