EBR risks overdone, infra bonds to revive investment: BofA Securities1 min read . Updated: 14 Jan 2021, 06:11 PM IST
- BofA Securities said public-sector undertaking (PSU) infra bonds are a good way of funding infra investment when high fiscal deficit constrain public capex and global uncertainties stall privatisation
MUMBAI: Extra budgetary resources (EBR) risks flagged in the economy are overdone, according to BofA Securities. Recent reports have indicated that the Union Budget 2021 may step up raising EBR to aid infrastructure investment, and that the government could seed a development bank that then raises money from investors.
However, BofA Securities said public-sector undertaking (PSU) infra bonds are a good way of funding infra investment when high fiscal deficit constrains public capex and global uncertainties stall privatisation. “RBI governor Shaktikanta Das has also pointed out that entities raising EBR often have their own cash flows," it said in a note on 14 January.
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That said, even as BofA Securities agrees that both direct government borrowing and EBR are part of the public sector borrowing requirement (PSBR), it does not believe that adding up the government's issuance of G-secs and EBR to measure crowding out, as they have very different liquidity effects. Hence, according to BofA, PSU infra bonds are fiscal- and liquidity-neutral way to fund public capex this year.
“When a bank bids in a G-sec auction, it has to carve the investment out of its loan/investment book. As the money flows to the government account with the RBI, money market liquidity shrinks. In contrast, if the public buys a PSU bond, funds flow from, say, its fixed deposit to PSU's current account. This does not impact banks' deposit base, asset book or money market liquidity," it said.
BofA expects finance minister Nirmala Sitharaman to target a still high fiscal deficit of 5% of GDP, albeit down from FY20's 7.9%. “With rising M3 growth limiting RBI open market operations (OMOs) we continue to expect the RBI to hike held to maturity (HTM) limits to incentivize banks to buy G-secs," the note said.