India Ratings and Research (Ind-Ra) opines the union government’s decision to reduce the front-loading of market borrowing programme, when the government bond yields have risen nearly 80bp yoy, is aimed at rationalising borrowing cost. This coupled with increased reliance on other means of funding fiscal deficit (increasing the utilisation of small savings’ proceeds) and a reduction in bond buyback programme is targeted to cap the union government’s gross market borrowings within FY19’s budget estimate of INR6.06 trillion, said the rating agency.
Out of the total borrowings of INR6.06 trillion budgeted for FY19, the government proposes to raise INR2.88 trillion in 1HFY19. Within the maturity buckets of proposed issuance, the government has introduced one-to-four years’ bucket and indicated plans to issue more floating rate bonds and introduce retail inflation indexed bonds. The government announced that nearly 10 per cent of the issuances could be through these floating rate bonds and inflation indexed bonds. These measures are aimed at creating a better demand-supply match in the debt market, said Ind-Ra.
Historically, the government has, on an average, borrowed 58 per cent -59 per cent of the full year’s borrowing in 1H. This proportion has been brought down to 47.6 per cent in 1HFY19, with one-third of issuances targeted through bonds maturing in less than 10 years and 22.6 per cent of borrowings targeted through bonds maturing over 20 years. The change in the central government’s fiscal deficit financing pattern - INR250 billion increase in funding from small savings will have an impact on the entire year’s market borrowing.
The government has also proposed to reduce the buybacks for the year by INR250 billion. While the move to introduce a short-term bucket is targeted to reduce interest cost and augment participation in the secondary market, it is likely to elevate redemption pressure over coming two-three years. Between FY19-FY21, the annual redemption of central government securities (G-sec) ranges between INR1.63 trillion-2.5 trillion compared to average INR1.4 trillion during FY14-FY18. Increased issuance in the one-to-four years’ bucket is likely to aggravate this pressure.