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Business News/ Market / Stock-market-news/  Floating rate bonds will help government borrowing plan: Dealers
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Floating rate bonds will help government borrowing plan: Dealers

According to bond dealers, shorter-maturity papers and floating rate bonds, tend to have lower risks from fluctuating interest rates

For 2018-19, the government’s gross borrowing plan stands at Rs6.06 trillion. Photo: Hemant Mishra/MintPremium
For 2018-19, the government’s gross borrowing plan stands at Rs6.06 trillion. Photo: Hemant Mishra/Mint

Mumbai/New Delhi: Shorter-duration and floating rate securities, as well as additional space for foreigners to buy securities will help ensure smooth sailing of sovereign borrowing, bond dealers told finance ministry officials at a meeting on Wednesday.

The meeting comes at a time when rising yields had led to fears that government may have to pay higher rates when it resumes market borrowing April. Around 20 primary bond dealers, who underwrite government debt, met finance ministry officials to give recommendations on the design of the borrowing programme for the first half of fiscal 2019. 

“It was a consultative meeting. A final decision will be taken later," a finance ministry official said. 

For the next fiscal, the government’s gross borrowing plan stands at Rs6.06 trillion.

According to bond dealers, shorter-maturity papers and floating rate bonds, popularly known as FRBs, tend to have lower risks from fluctuating interest rates.

Sameer Narang, chief economist at Bank of Baroda, said FRBs have lower risk of changing interest rates because the coupon is reset every six months. “So even in the rising interest rate scenario, the impact on the capital position, as banks have to make mark-to-market (MTM) provision, is usually lower," he said. 

The benchmark 10-year bond yield closed at 7.583% as against 7.618% on Tuesday. It has risen 112 basis points since the start of 2 August 2017, when the RBI had last cut interest rate.  Yields have risen on fears of a rise in interest rates following the widening of the current account deficit, higher fiscal deficit and prospects of faster rate hikes in the US.

State-owned banks, which play the crucial role of providing market liquidity, are not buying government bonds on worries that rising yields may force them to make MTM provisions.

Usually, banks have demand for shorter-maturity bonds, while insurance companies and pension funds prefer bonds maturing in 15 years and above. The 10-14 year maturity bucket is seen as the problem area.

“The borrowing programme can be designed in such a way that some of the supply in the 10-14 year bucket can be replaced with bonds in the less than 10 year and more than 15 year segments. This can also keep the average maturity of issuance in the 13-15 year range similar to the average maturity seen over the last five years," said A. Prasanna, chief economist at ICICI Securities Primary Dealership.

The ability of foreign portfolio investors (FPIs) to buy government bonds is restricted because of availability of lower quota. In the meeting, bond dealers also suggested that a hike in the limit could create demand from FPIs. 

Currently, FPIs have exhausted 97.42% of the available limit for investing in Indian government bonds. This is essentially for FPIs under open category, which is most active.

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Updated: 22 Mar 2018, 06:42 AM IST
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