BackYields drop a bit amid doubts over future borrowing
The markets may not be convinced about the Centre’s ability to keep the borrowing plan unchanged
PremiumThe 10-year government bond yield on Thursday closed lower by 2 basis points from the previous close of 6.01%, a day after the Union government announced its half-yearly borrowing numbers for 2020-21. This indicates that the slight softening of the bond yields was in reaction to the Centre sticking to the borrowing programme. However, the market still thinks that the government could go for additional borrowing in the fourth quarter.
On Wednesday, the government allayed concerns over extra borrowing for FY21. The gross borrowing is pegged at an unprecedented ₹12 trillion primarily on account of the shortfall in revenue that has happened as a result of the covid-19 outbreak and the higher public spending needed to revive the economy.
There is scope for additional borrowing in February-March, with the borrowing calendar ending in January 2021, according to Nomura.
“Assuming the quarterly gross issuance of T-Bills is unchanged into Q4 FY21, this would leave a financing shortfall of ₹3 trillion (1.5% of the gross domestic product) based on our projected financing requirement," Nomura said in a note.
“If auction sizes are maintained, they could raise an additional ₹1.08 trillion per month from G-sec issuance," it said.
On Wednesday, economic affairs secretary Tarun Bajaj said the Centre is retaining space for higher state development loans (SDLs) and private sector borrowings.
“Currently don’t envisage the need for a higher borrowing. However, we are keeping some space for states and the private sector," he said.
Borrowing by states may face upward pressure in Q4 as they scramble for funds amid a sharp contraction in tax collections, industry analysts said. This fiscal, state governments plan to borrow a gross amount of ₹2 trillion in Q3, 33% higher than the actual amount of ₹1.5 trillion in the year-ago period.
“Owing to the shortfall in tax collections and higher expenditure needs, we expect states’ consolidated GFD (gross fiscal deficit)/GDP to be around 4.5%. We expect overall FY21 gross SDL issuances to be around ₹8.7 trillion. States have so far borrowed ₹3.5 trillion in 1HFY21. With states planning to borrow ₹2 trillion in Q3, we expect Q4 SDL borrowing at ₹3.1 trillion," said Upasna Bharadwaj, chief eco-nomist, Kotak Mahindra Bank.
The RBI has already conducted ₹1.3 trillion worth of open market operations (OMOs) in the first half and is expected to do ₹2.5 trillion of total OMOs this fiscal year. This could ease liquidity and flatten yields even if the Centre’s borrowing increases.
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