Government Borrowing Program – H1 of 2020-21

The government borrowing program for the first half of 2020-21 has been announced. It is interesting to look at three features of the borrowing program from an investment perspective, that is the (i) spread of the borrowing program over H1 and H2, (ii) the maturity-wise concentration of the primary issues, and (iii) the month-wise distribution of the same.

The gross market borrowing programme announced in the budget of the central government was to the tune of Rs.7.80L Crs for 20-21, as against Rs.7.10L Crs in 2019-20. The net borrowings, net of debt servicing is at Rs.5.36 L Crs for 20-21 as against Rs.4.99 L Crs in 19-20. Of the gross borrowing program for the whole year 62.50% is the share of the primary issues for H1.

Maturity-wise Distribution:

A major portion of the government borrowing program is at the long end of the curve, in longer dated papers. 65% of the total borrowings is in 10 Years plus maturities. The pressure of the primary issues will be more at the long end of the curve. Quite often the interest of the overseas investors is also in long bonds, and given the fact that the government has already announced free open access to specified securities, it is highly likely that some of the longer dated papers may be thrown open to them for subscription.

Month-wise Concentration:

Our View:

The program of government borrowings for the first half, and more so for the Q1, is quite large, and would require the liquidity levels in the system to be much higher from the current mark. The pressure, if at all, will be at the long end. The smooth sailing may be facilitated by one or two rate cuts also.
The government, for now, has decided to stick to the fiscal deficit numbers declared in the budget, but given the current environment of sharp economic slowdown impacting the revenue and the pressures to perk-up the spending may lead to enhanced borrowing in the second half. In the wake of the corona virus impact on the growth numbers, the revenue targets of the government have started to look fairly aggressive.
The disinvestment target of Rs. 2.1 trillion for FY21 may get difficult to achieve if the current capital market conditions prevail for an extended period of time. As per street estimates, the revised estimates of fiscal deficit for FY20 can witness a further slippage of 50bps, and the slippages for the fiscal deficit as a percentage of GDP for FY21 may be even higher. Apart from the welfare package of Rs. 1.7 trillion declared by the government, additional relief for the industries is expected to be announced as well. Another major factor that can distort the fiscal math is the combined effect of sharp cut in small savings interest rate and the impact of economic slowdown on household savings. The fears of expansion in fiscal deficit have started reflecting at the longer end of the yield curve. The 10-year benchmark government security closed at a yield of 6.12% on 31st March, has spiked to 6.30% levels on 3rd April.

From an investment perspective we continue to recommend investments at the short to mid segment of the yield curve. At the current juncture, as the yields have hardened across the yield curve, this segment provides a dual opportunity of high accruals as well as potential for mark-to-market gains. The longer end of the curve may continue to be volatile, with heightened risks of fiscal deficits, and may be overly dependent on RBI actions by way of liquidity management and OMOs to keep a lid on the yields. The opening-up of Fully Accessible Route (FAR) may lead to enhanced flows in g-secs; this may take some time as inflows would not only be dependent on yield differentials but would also be a function of some semblance of stability returning in global markets and revival of overall flows to emerging markets.




Leave a Reply