The government’s borrowing calendar has not gone down well with the markets. According to plan, the government will borrow Rs 3,70,000 crore in the first six months of FY13, which is 65 per cent of the gross borrowing programme for the financial year. Bond dealers expect issuances of Rs 15,000-18,000 crore every week. This will push up yields on the benchmark 10-year government securities to 8.75 per cent levels in the coming months from the current 8.54 per cent.
According to Kotak Economic Research, after taking into account redemptions during this time, net borrowing will be Rs 2,84,000 crore, nearly 50 per cent higher than the net borrowing in FY12. Of course, the government is expecting its gross borrowing to be less than the budgeted Rs 5,69,000 crore, if small savings pick up pace on higher rates. Typically, the government funds the fiscal deficit through borrowings (dated securities or gilts), surplus cash and small savings collections. However, last year, since the coupon rates on small savings were lower than on term deposits, the government found it tough to garner resources from this avenue. This resulted in much higher issuance of gilts. This year, the government expects the trend to reverse.
The government’s borrowing programme has obvious implications for financial markets. While the quantum of paper expected to hit the market is a dampener, what fixed income strategists find interesting about the auction plan is that every week, all maturity segments will be auctioned. Typically, in a high interest rate scenario, the average maturity of the borrowing plan is lower. In the first half of FY13, 68 per cent of the issuances will be below 15-year maturity. This is lower than the 75 per cent levels seen in the previous year. According to IDBI Bank’s fixed income experts, the current maturity profile might have been formulated with expectations of softening in interest rates during fiscal 2012-13.
While the government may be optimistic about the rate environment, its massive borrowing plan will effectively keep liquidity very tight and bond yields high. This will mean any interest rate cut will be lower than expected - at less than 100 basis points through the year. A massive borrowing programme will also see the liquidity deficit persisting, which will make rate cuts even more difficult.
The equity markets will also see some correction as the current valuations have been pricing in rate cuts of at least 100 basis points. This will mean stock markets too, will see a correction as the gap between sovereign yields and the earnings yield of the market widens further, says Dhananjay Sinha, economist and equity strategist at Emkay Global.
