Gross borrowing for fiscal 2019-20 has been pegged at Rs 7.1 trillion while net borrowing was at Rs 4.73 trillion against Rs 4.22 trillion in the current fiscal year, according to the interim Budget on Friday.
The fiscal deficit for the current fiscal year was pegged at 3.4 per cent of the gross domestic product (GDP), which is slightly higher than the 3.3 per cent projected earlier. In fiscal year 2019-20 also, the fiscal deficit has been pegged at 3.4 per cent.
Bond dealers said foreign portfolio investors were heavy sellers as they expect pressure on yields to continue in the coming days.
“The market seems to be disappointed that the government is not meeting the fiscal deficit target for yet another year,” said Kumar Sharadindu, managing director (MD) and chief executive officer (CEO), SBI Pension Funds.
This is the fourth consecutive year that the government compromised on fiscal consolidation and the targeted glide path. However, even that is not sure as the revenue projections could be difficult to achieve, said Arvind Chari, head of fixed income at Quantum Advisors.
“We are seeing a very high assumption on tax with GST growth assumed at 18 per cent for FY 20. This will be difficult to achieve as things stand currently. The Budget is inflationary with overall expenditure at 13 per cent along with the new spending on farmer income support,” Chari said.
In 2018-19, the gross borrowing was at Rs 5.71 trillion, lowered from the initial Rs 6.05 trillion as the government in September had decided to borrow less. The gross borrowing for 2019-20 is higher, partly taking into account higher redemptions. Still, on a net basis, the borrowing is higher by about Rs 50,000 crore.
The redemption next fiscal year will be around Rs 2.37 trillion against Rs 1.48 trillion in the 2018-19 fiscal year. The government plans to ‘switch’ Rs 50,000 crore of bonds, which is essentially issuing longer dated securities against securities maturing in the near term.
This transaction typically happens with the Reserve Bank of India (RBI) and does not disturb the market. In the current fiscal, the switch was to the tune of Rs 28,059 crore.
The bond market was disappointed with the borrowing numbers. Yields on the most traded 9-year bond (which was the benchmark 10-year one till last year) jumped 13 basis points to close at 7.61 per cent while the benchmark 10-year bond yields rose 10 basis points to close at 7.38 per cent. The rupee, however, remained stable and closed at 71.3 a dollar, from its previous close of 71.1 a dollar.
“The borrowing numbers are high no doubt. Therefore, pressure on the RBI to conduct open market operation (OMO) purchases would continue in the next year,” said Sharadindu.
In this fiscal, the RBI plans to buy bonds to the tune of Rs 2.5 trillion from the secondary market. This has come as a relief for the bond market.
However, the market doubts if that would be the case after the new government assumes office in May.
“At least till elections in May, a stable state would be maintained in the bond market. After that, the next government may have to reduce its spending on infrastructure,” Sharadindu said.
The market doesn’t have a firm view on the yields, and much depends on what the RBI’s stance is regarding OMOs.