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Borrowing calendar sticks to the script

* The H2FY22 borrowing calendar throws no surprises, with gross borrowing at Rs5.03tn (41.7% of total FY22 borrowing of Rs12.1tn) and net at Rs3.77tn. GST compensation cess related borrowings for states again get subsumed in H2 normal borrowings, implying that the government’s own fiscal funding has de-facto been reduced by the same amount (Rs1.6tn). The issuance pattern is fairly balanced, with the 10-14yr bucket representing 46.3% of issuances and the 5yr bucket seeing supply relief.

* With easing supply pressures, fiscal silver linings and improving prospects in GBI inclusion, bonds could take a sigh of relief and watch for the RBI’s next GSAP tranche in the upcoming policy. We think the RBI will tread with more GSAPs ahead, albeit with a lower amount with part/full sterilization. Other liquidity tools, like 1) FX intervention biased in forwards, 2) partial delivery of maturing forward book, and 3) enhanced VRRRs quantum and pace/duration, will continue. The RBI will maintain its preference for curve flattening with the GSAP+OT/VRRR combination and will strive to fix the skewed yield curve. On net, we think the 10-year yield could hover in the range of 6.00-6.30% for the rest of FY22.

Government sticks to the script; subsumes GST compensation cess in H2FY22 borrowing

The H2FY22 Gsec borrowing calendar is in line with the FY22BE gross market borrowing target of Rs12.1tn. This belied hopes of a small segment of the market that assumed that the government might announce higher borrowing amid GST compensation cess related borrowings for states amounting to Rs1.6tn for FY22. We note the government subsumed GST-related H1FY22 announced borrowing of Rs750bn within its regular borrowing program, and given the robust tax collection stream, we did not expect the government to change this strategy in H2FY22.

The details show the H2FY22 gross borrowing will be Rs5.03tn as against Rs6.04tn in H2FY21 and Rs7.02 tn in H1FY22. The H2 gross borrowing stands at 41.7% of the FY22 gross borrowing of Rs12.05tn. The net issuances for H2FY22 will be Rs3.77tn as against Rs5.33tn last year. The government also noted that they reserve the right to borrow an additional Rs20bn in each auction via a green-shoe option, which will be adjusted in H2FY22.

Meanwhile, the WMA limits have been reduced to Rs500bn (Rs1.2tn in H1) in order to smoothen short-term fiscal mismatches. The gross issuance of short-term T-bills in Q3FY22 would be Rs2.6tn. Of this, 91-day, 182-day and 364-day bills would account for Rs1.3tn, Rs390tn and Rs910bn, respectively.

The state borrowing calendar has not been announced yet. 46.3% of borrowing concentrated in the belly

The weekly dated securities auctions will be evenly spread in 21 weeks and the size of these auctions will mostly be Rs240bn vs. Rs260-320bn weekly amounts in H1FY22. The concentration of supply is heavy around the belly, with around 46.3% to be issued in the 10-14yr bucket and the 5yr bucket seeing a substantial fall (11.9% vs. 19.8% in H1).

The share of long-dated maturities (30-40yr) is higher vs. H1. The shortest end appears lighter at 4% of total issuances and FRBs account for an 8.7% share. Fully Accessible Route or FAR securities (5yr, 10yr and 30yr), having no investment limit and macro-prudential restrictions for FPIs, account for 54.3% of H2FY22 issuance. FAR securities are seen as policymakers’ efforts to ease foreign investment norms as it strives to be part of Global Bond Indices (GBI) ahead.

Bonds to have sigh of relief; RBI’s GSAP stance to be watched

Improving fiscal health has eroded the additional supply risk of Rs1.6tn of GST compensation cess, technically implying that the government’s own fiscal funding related borrowing has de facto been cut by the same amount. For FY22, the tax revenue assumptions in the budget look extremely conservative and could surprise on the upside by around 0.7%-0.9% of GDP.

However, the trend in other revenue streams, namely divestment and (pick-up in) spending trends, would be key for fiscal management. Nonetheless, the emerging fiscal silver lining, along with the expectation of strengthening the case of GBI inclusion, could keep the momentum positive for bonds. However, the RBI’s liquidity conundrums will find little respite. The next tranche of GSAP will be in focus in the upcoming policy.

Even as the RBI continues with GSAP ahead (albeit a much shallow amount), the sterilization of the same might again be done, while other liquidity management options like forward FX intervention and partial delivery of maturing forwards will continue. VRRRs’ quantum and pace/duration will also pick up. The RBI will continue to strive to fix the skewed yield curve and maintain its preference for curve flattening with the GSAP+OT/VRRR combination. On net, the 10-yr yield could hover in the range of 6.00-6.30% in the remainder of FY22.

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