Bond market uncertain about govt's borrowing plans in next fiscal

The bond market is suffering from an acute uncertainty about the borrowing plan for the next fiscal year, which will be spelt out in just seven days from now in the vote on account on February 1. 

The estimates of gross and net borrowing for the next fiscal depends upon the person. A section of the market expects the government to borrow at least Rs 7 trillion, up from its current fiscal’s Rs 6 trillion. The net borrowing was estimated at around Rs 4.07 trillion, but now stands around Rs 3.82 trillion. 

For example, Standard Chartered Bank expects the fiscal gross borrowing in the next fiscal would be at Rs 7.14 trillion, against Rs 5.45 trillion in the present fiscal. The states’ gross borrowing, according to Standard Chartered would also be at high level of Rs 5.68 trillion, from Rs 4.92 trillion in the present fiscal. 

The redemption next fiscal will be around Rs 2.48 trillion, against Rs 1.63 trillion in the 2018-19 fiscal. 

Another section says the net borrowing could be at around the same level as the present fiscal, but the gross number will inflate because of higher redemptions next year. 

“I don’t expect the borrowings to be more than Rs 10,000-Rs 20,000 crore from the present level,” said Jayesh Mehta, head of treasury at Bank of America Merril Lynch. 
 

Many expect the government to introduce some sops for farm distress, but by cutting other expenditures. However, if the government remains silent on special schemes, the bonds will rally. 

However, both are guesswork at best, considering that the two most important persons holding the key of fiscal state of affairs in an election year, Prime Minister Narendra Modi and Finance Minister Arun Jaitley, are silent about the possible populist schemes that could be announced to woo voters. A farm debt scheme is a real possibility, but these two key people have not said much about it. Therefore, the market is unable to key in numbers. 

“It is a wait and watch at best,” said Harihar Krishnamurthy, head of treasury at First Rand Bank. 

The market will be keenly watching the Budget and RBI policy review to determine the future course of action. 

“The market was earlier expecting a rate cut by the RBI in February, but now it seems it would be some gradual easing. So, there is that uncertainty as well,” Krishnamurthy said. 

And this wait has caused some volatility in the bonds nevertheless. The most-traded nine-year bond yields have seen volatility due to this uncertainty, rising to 7.6 per cent level, only to retract couple of basis points less as the market uncertainty continues. 

But the trading volume remains healthy, thanks to the system getting liquidity support from the Reserve Bank of India through its secondary market bond purchases. 
 

Whatever be the case, the spread between government bonds and corporate bonds have remained wide and next year’s borrowing programme could put further pressure on the spread. 

“GSec issuances may get further support from foreign portfolio investors and open market operations, whereas bulging state development loan issuances will likely emerge as a big challenge. This will exert upward pressure on corporate bond curve owing to substitution effect for long-term corporate bond investors,” said Soumyajit Niyogi, associate director for rates at India Ratings and Research.