The government will be borrowing Rs 8.1 trillion from the market in fiscal year 2020-21 (FY21).
Contrary to market expectations, it will not engage in extra borrowings in the current financial year. Instead, it will mobilise higher resources from small savings, Budget documents show.
However, not everybody in the market is ready to buy the math.
The extra borrowings may not happen even as the fiscal deficit widened to 3.8 per cent of the gross domestic product (GDP) for FY20 from 3.3 per cent budgeted earlier, as the government leaned on the trigger clause of the Fiscal Responsibility and Budget Management Act (FRBM). The fiscal deficit for next year is estimated at 3.5 per cent of the GDP.
The gross borrowings for next year was largely in line with market expectations, but most were expecting the government to borrow Rs 30,000-50,000 crore extra from the bond market during the current fiscal year.
Instead, the government said it will manage the resources raising Rs 2.4 trillion through small savings certificates for the current fiscal, against Rs 1.3 trillion estimated in the July Budget.
For FY21, as well, the government expects to raise Rs 2.4 trillion from small savings.
Bond market participants pointed out that the small savings target for the current fiscal year is very ambitious and the threat of extra borrowings is not gone completely.
Against the Rs 2.4 trillion for the current fiscal year, small savings mobilisation till December has been only Rs 1.21 trillion, according to data from the Controller General of Accounts. Essentially, the government is expecting that in the remaining three months, it will be able to raise the balance Rs 1.19 trillion from small savings. The bond investors are not sure how this could be achieved.
Overall, the net market borrowings for the fiscal year 2019-20 would be Rs 4.99 trillion and be Rs 5.36 trillion for fiscal year 2020-21.
In her speech, Finance Minister Nirmala Sitharaman said “certain specified categories” of government bonds would be opened fully for non-resident investors, apart from being available to domestic investors as well.
“This could be a precursor to inclusion in the global bond index. Some countries, such as China, have actually not opened their entire bond market to foreigners, but given full access to certain bonds for inclusion in the global bond indices,” said Jayesh Mehta, head of treasury at Bank of America.
According to Mehta, the Budget is positive for the bond market and yields should fall a 5-7 basis points on Monday.
The government said it will formulate a legislation for laying down a mechanism for netting of financial contracts so that confidence is generated in credit default swaps.
It also increased the foreign portfolio investor (FPI) investment limit in corporate bonds to 15 per cent of the outstanding from 9 per cent earlier.
“Formalising netting of financial contracts is a good move, but the benefit arising out of FPI limit increase in corporate bonds may not be evident immediately. This is because the existing limits remain underutilised most of the time,” said Mehta.
B. Prasanna, group head of global markets, said the move to enhance limits for FPI holding in corporate bonds and tax free incentives for sovereign wealth funds are positive measures.
However, the move to offer lower income tax rates if no exemption is claimed can eventually harm the bond market, as this will impact insurance company sales. And, insurance companies are the biggest bond buyers after banks.
For next year, the bond supply is high, including ‘switch’ of Rs 2.7 trillion, said bond dealers. In a switch transaction, the government gives longer term bonds in lieu of bonds maturing within a shorter period.
“The problem is that the duration risk increases, and while it may seem revenue neutral, the investor loses the appetite to take part in long-term bond auctions,” said a senior bond trader, requesting anonymity.