Bond market doesn't expect surprises

Ballooning of states' debt paper a growing concern, including effect on corporate sector

The central government is likely to keep the gross borrowing number on the higher side, considering the heavy redemption pressure in the next financial year. However, net borrowing could be at par with that in this financial year, say economists and bond dealers.

In 2017-18, about Rs 2.28 lakh crore of bonds are set to mature. The government borrowing programme will have to account for it. To avoid paying the entire amount at one go, the government enters into arrangements with the Reserve Bank of India (RBI) or large institutions like insurance companies to swap some of the maturing bonds with dated papers, maturing in five to 10 years. This is called a ‘switch’.

The switch doesn’t disturb the market, as the government buys these from the secondary market and swaps it with longer tenure bonds issued to these institutions. This time, bond dealers expect the government to switch at least Rs 30,000-40,000 crore, to keep redemption pressure low.

The gross borrowing number for the current financial year turned out to be Rs 5.82 lakh crore, after the government cancelled Rs 18,000 crore of auction earlier this month. The net borrowing, after adjusting for the reduction, stood at 4.07 lakh crore. Government borrows from the market in the form of dated bonds to bridge its money deficit.

“This time, the fiscal (numbers) could be a bit loose, owing to the focus on infrastructure spending but the government might get good support from small savings and other sources, thereby keeping the borrowings within a reasonable limit,” said Ram Kamal Samanta, vice-president for treasury at SBI DFHI.

He expects net borrowing to be Rs 4.15-4.2 lakh crore and gross borrowing at around Rs 6 lakh crore, about the same as the current financial year.

Siddhartha Sanyal, India economist for Barclays, estimates the net borrowing to be Rs 4.25 lakh crore and gross borrowing at Rs 6 lakh crore, after adjusting for the switch. He expects a fiscal deficit at 3.3 per cent of the gross domestic product (GDP).

State Bank of India’s group chief economist, Soumya Kanti Ghosh, expects gross borrowing at Rs 5.8 lakh crore and net at 4.05 lakh crore, on a fiscal deficit of 3.4 per cent of the GDP and tax revenue of Rs 13.7 lakh crore.

“After accounting for other liabilities, we estimate net borrowings through dated securities at Rs 4.4 lakh crore. After accounting for some more buybacks/switches in the remaining part of FY17, we estimate redemptions for next year at around Rs 2 lakh crore. This implies a gross borrowing number for FY18 at Rs 6.4 lakh crore, higher than Rs 5.8 lakh crore in FY17,” wrote the IDFC Bank chief economist in his report.

The bond market is not so worried about the Centre’s borrowing programme this time. What they are concerned is how the state governments would borrow. State Development Loans (SDLs), another term for bonds issued by states, are getting too huge for the market to absorb, say observers. The exact amount of these are difficult to gauge, as various states provide estimates at different times. Worse, they don’t stick to their plans and go on borrowing more than planned.

Earlier, SDLs were used to be about one third of the Centre’s borrowing but have since become almost equal to the latter's net borrowing. States have already borrowed about Rs 3 lakh crore from the market on a net basis. By the end of the financial year, March 31, this could touch Rs 3.5 lakh crore. This is crowding out private demand, say bond market participants. They fear worse with demonetisation and the resulting revenue loss.

“Borrowing by the central government has been stable, whereas borrowing by states have increased substantially. This year, net borrowing by states can come closer to that of the Centre. So, the critical element is states' borrowing, where market participants might not have clear views, owing to absence of proper borrowing details at the starting of the fiscal,” said Soumyajit Niyogi, associate director at India Ratings and Research. “High state borrowing can exert pressure on the corporate bond curve, disallowing further softening.”