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Borrowing calendar: throws no surprises

* H1FY22 borrowing calendar bears the usual pattern of front-loaded borrowing with gross issuances of Rs7.24tn (60% of total FY22 borrowing), while net issuances will be Rs5.85tn. However, funding reliance on short-term borrowings remains significant, with high T-bill issuances (Rs4.68tn) and higher WMA limits, similar to H1FY21 fiscal funding trends. The GSec issuance pattern is fairly heavy in the longer end versus past trends, with the 5-14yr bucket consisting of 60.5% of issuances.

* With elevated borrowings, policy rates likely having bottomed out, and increasing global yields, the appetite for duration risk on G-Sec will likely fade. Thus, RBI support in the form of vigorous OMOs/OT will be required to maintain demand-supply balance and pressure on longer end of the curve. Amid some natural normalization of liquidity in FY22 and shifting out of banks SLR demand will mean that net OMO purchases could reach close to Rs4.5-5tn in FY22. We expect the 10-yr yield to hover around 6.00-6.50% in CY21.

Government sticks to the script; front-loads FY22 borrowing in H1

The H1FY22 G-Sec borrowing calendar has been announced pretty much in line with normal trends, belied hopes of a small segment of market noises that the government might surprise by reducing the borrowing a tad amid high carry forward of cash surplus from FY21 (estimated ~Rs2.5tn). H1FY22 gross borrowing will be Rs7.24tn as against Rs7.66tn in H1FY21 and Rs6.04tn in H2FY21. Gross borrowing stands at 60% of FY22 gross borrowing of Rs12.05tn. Net issuances for H1FY22 will be Rs5.85tn as against Rs6.35tn last year. The government also noted it reserves the right to borrow additional Rs60-80bn in each auction via green-shoe option, to be adjusted in H2FY22. Meanwhile, WMA limits have been unchanged at Rs1.2tn to smoothen short-term fiscal mismatches. Q1FY22 short-term T-bill gross issuances would be high at Rs4.68tn (net Rs1.77tn) from Rs5.3tn in Q1FY21. Of this, 91-day,182-day and 364-day bills would respectively account for Rs1.95tn, Rs1.95tn and Rs780bn. The state borrowing calendar has not been announced yet.

~61% of borrowing concentrated in 5-14yr bucket

Weekly dated securities auctions will be fairly evenly spread in 25 weeks. The weekly dated securities auction size will vary between Rs260bn to Rs320bn, as against Rs300bn weekly amounts in H1FY21. The concentration of supply is heavy around the belly, with around 40% to be issued in 10-14yr bucket. The 5yr bucket also sees substantial increase, making the 5-14 bucket the dominant 60.9% of total issuances. The share of longer dated maturities 30-40yr is higher compared to H1FY21. The shortest end appears lighter at 5% of total issuances and FRBs account for 6.6% share. Fully Accessible Route or FAR securities (5yr, 10yr and 30yr), having no investment limit and macro-prudential restrictions for FPIs, account for 55.5% of H1FY22 issuance. FAR securities are seen as policymakers’ efforts to ease foreign investment norms as it strives to be part of Global Bond Indexes in the medium term.

Limited steam in bonds; RBI’s OMO/OT to be the key to reduce pressure at longer end

Despite steep actions and verbal intervention by the RBI, the market remains unconvinced amid heavy borrowing this year. The H1FY22 calendar, though offers no surprises, is duration heavy and thus pressure on the longer end of the curve will continue. The recent respite in yields pertained to the cancellation of the last G-Sec auction worth Rs200bn in FY21, despite rising US yields. For FY22, we think the tax revenue assumptions are rather conservative in the budgeted estimates and could surprise on the upside. However, consequent borrowing adjustment, if any, would likely be a story of the latter half of H2FY22. With elevated borrowings and policy rates likely having bottomed out, the appetite for duration risk on G-Sec will likely fade.

Thus, RBI support in the form of vigorous OMOs will be required to maintain demand-supply balance and pressure on longer end of the curve. We expect the RBI to get more accountable and actionoriented as we move into FY22. We think amid some natural normalization of liquidity in FY22 (CRR reversal, halving of BoP surplus to USD50bn, increasing CIC) and shifting out of banks SLR demand will mean that net OMO purchases could reach close to Rs4.5-5tn in FY22. The RBI will continue to strive fixing skewed yield curve and maintain its preference for curve flattening.

Besides, the global reflation trade (even with missing credible inflation), if continues, along with growth normalization, could further push up global yields further up during the year and could have a spill-over effect on India as well. In sum, we think the 10-yr yield could hover around 6.00-6.50% in CY21.

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