Budget 2020: Markets brace for Rs 8-trillion gross borrowing in FY21

The bond market expects the government to announce heavy borrowing in the next fiscal year, but the numbers could be masked through off-balance sheet items, such as enabling public sector companies to raise government-serviced bonds.

“Going into the Budget, the broad consensus of market participants for 2020-21 (FY21) fiscal deficit is at 3.5 per cent, which would translate into gross borrowings of Rs 7.7-7.9 trillion. A credible Budget which throws up anything below these numbers would be a positive surprise for the market,” said B Prasanna, head of global markets and proprietary trading group, ICICI Bank.

Bond traders say the market wouldn’t be perturbed if the government is not able to keep the fiscal glide path in mind and overshoots its targets by 0.5 percentage points, as allowed under the Fiscal Responsibility and Budget Management Act.

“The situation is actually very similar to what it was in 2014-15, when the market was okay with the government breaching the target, but the government didn’t do that,” said a senior bond trader.

“What upsets the markets and foreign investors most is creative accounting,” said a bond trader.

One such creative mode of accounting is allowing public sector undertakings to raise government serviced bonds. While the government pays for the principal and interest, the numbers don’t reflect in the total borrowing. Such a possibility has already taken credence after the Nabard last Friday said it would be raising Rs 7,000 crore worth of government serviced bonds on Friday.

In the current fiscal year, Rs 57,000 crore of such bonds were planned to be raised, but except Nabard, nobody had raised such bonds. In 2018-19, however, Rs 64,192.10 crore of such bonds was raised. “The gross borrowing is expected to be between Rs 7.6 million and Rs 7.9 trillion. We expect the off-balance sheet borrowing to continue next year as well,” said Badrish Kulhalli, head of fixed income at HDFC Life Insurance.

The expectation now is that in the Budget, the Centre may announce Rs 1 trillion of such government serviced bonds, including those pending in this fiscal year. In that case, the gross borrowing could be shown at around Rs 7.5 trillion or even less. This will bring down yields on government bonds and help the government borrow government securities cheaply. What is of concern though is that the states are also increasing their borrowing from the market, and this is crowding out the private sector.

“With repayment around Rs 2.35 trillion, gross borrowings of the Centre are expected to come at Rs 7.85 trillion. In addition, states are expected to borrow Rs 7 trillion, thus, taking the total borrowing for FY21 to be closer to Rs 15 trillion,” said Soumya Kanti Ghosh, group chief economic advisor of SBI. One way of mitigating this is by offering higher limit to foreign portfolio investors in Indian bonds. Indeed, the government is considering increasing the limit of foreign portfolio investments to 10 per cent of the outstanding, from the current 6 per cent. This may get announced in the Budget itself, say sources. But on an immediate basis, the market is gearing up for extra borrowing for the current fiscal year.