Government Borrowing Program: Some Interesting Features

The curiosity about the government borrowing program is much less compared to the other developments around the fisc. This is because the quantum of borrowing is clearly laid down in the budget a couple of months ahead of the new financial year. But things like the maturity profile of the borrowing, the composition in terms of instruments etc. still would be of interest to the markets.

The government borrowing program is as heavy to say the least, and it compares favourably with that of the last financial year, Rs.12 Lakh Crs. But, as it has been the trend, a major portion of the borrowing will be completed by end of Sept,21. On an average, an amount of Rs.1.15 Lakh Crs will hit the markets every month. As you may be aware, as the government issues fresh securities liquidity to the extent of the fresh issue is taken away from the market. This would require the RBI to initiate measures by which the liquidity conditions are made more robust for the auctions to go through without much difficulty. That would determine to what extent the borrowing program would exert an upward pressure on yields.

There is an appreciable rise in the issue of long bonds, as per the calendar, and this is a good feature. The issue of  long dated bonds will provide liquidity to the gilt market and would also promote long-term investing by institutions like insurance companies, provident funds, and pension funds. This may be useful for overseas investors too, especially funds which are looking for long term investments. Therefore, this is a good feature from that limited perspective.

Yet another feature which is interesting is the commitment to issuing floating rate papers, the largest ever quantum in any particular year. This may have quite a good level of demand in view of the fact that they will offer some protection in the event of hardening yields. Earlier issues in this category had long maturity profile and that was a disincentive for many investors who were looking for slightly shorter instruments, may be, in the two- or three-year time frame.

One of the questions that is most relevant is – how smoothly the borrowing program can sail through? The answer is that it may sail through provided the RBI initiates measures by which the liquidity conditions are kept conducive to such heavy borrowing, through open market operations and through operation twists etc. But with higher inflation, rising bond yields in developed markets, and the need for normalization due to potentially higher growth rates could all make things difficult. Compared to the conditions that were prevailing last year the conditions prevailing this year are a bit more challenging.

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