Government sticks to Rs2.08 trillion borrowing plan for FY18

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Mumbai: The government will raise Rs2.08 trillion through market borrowings in the second half of 2017-18, sticking to its budget, but does not rule out the possibility of selling more government bonds for additional spending.

The majority of the borrowing would be completed by December, economic affairs secretary Subhash Chandra Garg said in a press briefing on Thursday. According to the calendar released by the Reserve Bank of India (RBI), the government will raise Rs1.65 trillion by the end of December.

Garg said the need for additional borrowing would be assessed in December once the supplementary demand for grants is placed in Parliament. He said the government was sticking to the fiscal deficit target of 3.2% of GDP “as of now”.

With economic growth sagging to a three-year low of 5.7% in the June quarter, debate about the merits of a fiscal stimulus has taken centre stage. In Union Budget 2017, the government pegged its aggregate gross market borrowing at Rs5.8 trillion.

It had front-loaded borrowings in the first half of the fiscal year when it raised Rs3.72 trillion. However, expenses have also been front-loaded. Fiscal deficit reached Rs5.05 trillion for April-July, or 92.4% of the budgeted target for the current financial year, meaning there is little elbow room left for the government to boost spending without breaching the target.

According to Rupa Rege Nitsure, group chief economist at L&T Financial Services, by sticking to the borrowing numbers, the government has sent a positive signal and avoided negative implications on ratings.

“By December, they will have a better view of the revenue shortfall because currently there still some problems with GST (goods and services tax). Going by the budgeted number would also ensure that bond yields don’t harden further and help contain borrowing cost. They have not just stuck to the fiscal deficit target but also raised the limits of foreign portfolio investment (FPI) in government securities and state development loans. This too will add to the positive sentiment. Increased FII interest & lesser hardening of interest rates will be positive for equities also. And any upside in stock prices will be supportive of their divestment programme,” Nitsure said.

On Thursday, RBI also notified that limits for foreign portfolio investors (FPIs) for October-December increased by Rs8,000 crore for government securities and Rs6,200 crore in state development loans. So far, foreign institutional investors have bought $20.26 billion in debt, one of the key reasons that pushed bond yields lower. However, the trend reversed in the recent past with talks of a fiscal stimulus.

On 24 July, yield on 10-year benchmark government bond closed at 6.41%, the lowest in this fiscal. Since then, yields have risen 23 basis points to 6.64% at the close on Thursday.

One basis point is one-hundredth of a percentage point.

Ajay Manglunia, executive vice-president and head, fixed income at Edelweiss Financial Services, expects yield on the 10-year government bond in a band of 6.55-6.75% in the near term.

He said bond yields will be influenced by factors such as demand-supply dynamics and global developments especially related to central banks, and the market will watch out for cues which may give indication that the government may step up spending and deviate from the path of fiscal consolidation.

The government borrowing programme, which is spread across 17 weekly auctions of government bonds, ends on 9 February, 2018, according to a calendar released by RBI on Thursday. This translates into government bond issuances of Rs15,000 crore every week till the end of December.