Fri. Mar 29th, 2024
RBI

KOLKATA: The Government of India, on Friday, announced a significant revision in its 2020-21 borrowing programme. They have effectively increased borrowing estimate by staggering ₹4.2 Lakh Crore to a total of ₹12 lakh crore for the current financial year. This 53.85% increase in the limit was sanctioned to deal with the expected shortfall in revenue due to the impact of COVID-19 crisis on the Indian economy. “The above revision in borrowings has been necessitated on account of the COVID-19 pandemic,” the Reserve Bank of India (RBI) said in a statement, on its website.

Between May 11 and September 30, the government will borrow ₹6 Lakh Crore from the market. The original plan, as announced on March 31, was that the borrowing in the first half (between April and September) would be ₹4.88 Lakh Crore, of which the government has already borrowed ₹98,000 Crore from the markets. The government has also increased the weekly borrowing target to ₹30,000 Crore from the ₹21,000 Crore limit which was fixed on March 31 as well.

‘The estimated gross market borrowing in the financial year 2020-21 will be ₹12 Lakh Crore in place of ₹7.80 Lakh Crore as per BE 2020-21. The above revision in borrowings has been necessitated on account of the COVID-19 pandemic,” the Finance Ministry said, in a separate statement.

RBI had been given a relatively free hand to keep the yield curve in check through expanded open-market operations (OMOs) in the secondary markets, some sources are saying.

“The RBI will have to participate in OMOs in some way and keep the yield curve from jumping up. There will clearly be pressure on yields and the RBI will have to manage it. It will involve expanded OMOs,” said an official involveda in the relevant developments. When asked if the increased target also means that the RBI will monetise the deficit by directly purchasing bonds from the government, the official added, “The RBI has so far not been keen on private placements.”

Finance Minister Nirmala Sitharaman, in her Budget for 2020-21, had pegged gross borrowing in the new financial year at ₹7.8 Lakh Crore, higher than ₹7.1 Lakh Crore estimated for 2019-20.

Now, Officials confirmed that the discussions between the finance ministry and the central bank on increasing the borrowing target took place in the past 7-8 days, after the new economic affairs secretary, Tarun Bajaj, took charge. There were extensive deliberations on whether the increase should be announced now or in September, along with the borrowing calendar for October-March.

So, government officials have explained that this increased borrowing limit means the 2020-21 fiscal deficit target of 3.5% of gross domestic product (GDP) no longer holds, since borrowing is one of the means of financing this deficit.

A quick calculation shows that, provided all other parameters remain the same, the fiscal deficit is expected to expand to around 5.3% of the GDP, this year. However, the other assumptions made in the Budget, like a 10% nominal growth in GDP, will clearly not be realised because of the ongoing global pandemic.

“The fiscal deficit will expand, but we can’t put a number on it, since the situation is quite dynamic,” a government official said. The revised calendar shows that there could be ₹1.2 Lakh Crore of borrowing, every month. Clearly, this is way more than the market’s appetite. All kind of dated securities maturing in two years and above will be used, including floating rate bonds, sources explained.

Additionally, bond yields nosedived as the government introduced a new 10-year bond with a cut-off coupon of 5.79%. The 10-year bond yield, widely considered to be the old benchmark, also dipped below 6% for the first time since February 2009. This yield of 5.79% is below its previous close at 6.05%. The bond market was bullish, before the surprise borrowing calendar was announced, expecting further rate cuts and not a very large package, according to Harihar Krishnamurthy, head of treasury at FirstRand Bank.

Clearly, the government aims to borrow cheap, but the corresponding yields will shoot up, unless the RBI comes up with deep rate cuts, or declares heavy secondary market bond purchases, say industry experts. According to Soumya Kanti Ghosh, group chief economic advisor of State Bank of India, the central bank must now conduct reverse repo and term reverse repo operations without any collateral.

Such non-availability of securities in liquidity operations will boost the demand for government securities, and if a Standing Deposit Facility is introduced — under which the RBI would absorb liquidity at a lower rate than reverse repo and without any collateral — the entire interest rate structure could be pulled down.

“In particular, lower operative overnight rate, short-term rate and lower supply and generation of additional demand will bring down the yield of long-dated government bonds also, thereby pulling down the sovereign yield curve. This will also reduce the interest cost of RBI,” Ghosh said.

Furthermore, Ghosh added that this additional borrowing could result in a spike in g-sec yields, but ultimately empirical research in the Indian context suggests that term structure of interest rates is a function of real economic activity and, hence, it could decline.

With this new borrowing calendar in place, chances of private placement with the RBI have more or less been quashed. “We need considerable support from the RBI, else its rate cuts will become redundant. Amid a credit crisis, borrowers would face more challenges, while investors would be more focused on inter-temporal choices,” said Soumyajit Niyogi, associate director at India Ratings and Research.

 

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