Bond market doesnt expect surprises

The central government is likely to keep the gross borrowing number on the higher side,considering the heavy redemption pressure in the next financial year. However,net borrowing couldbeatparwith thatinthisfinancialyear,say economists and bond dealers.

In 2017-18,aboutRs.2.28 lakh crore of bonds are set to mature.The government borrowing programme will have to account for it.To avoid paying
theentire amountat on ego,the government enters into arrangements with the Reserve Bank of India(RBI)or large institutions like insurance companiestoswapsomeofthe maturingbondswithdated papers,maturinginfiveto10 years.Thisiscalleda‘switch’.

Theswitchdoesn’tdisturb themarket,asthegovernment buysthesefromthesecondary market and swaps it with longertenurebonds issuedtotheseinstitutions.Thistime,bond dealersexpectthegovernmenttoswitchat least~30,000-40,000 crore,tokeepredemption pressurelow.

The gross borrowing number for the current financial year turned out tobe Rs.5.82lakh crore,afterthegovernment cancelled Rs.18,000croreofauctionearlierthismonth.Thenet borrowing,afteradjustingfor thereduction,stoodat4.07 lakhcrore.Governmentborrowsfromthemarketinthe formofdatedbondstobridge itsmoneydeficit.

“Thistime,thefiscal(numbers) could be a bit loose, owingtothefocusoninfrastructure spending but the governmentmightgetgood supportfromsmallsavings and other sources, thereby keepingtheborrowingswithin areasonablelimit,”saidRam KamalSamanta,vice-presidentfortreasuryatSBIDFHI.

Heexpectsnetborrowing tobe Rs.4.15-4.2lakhcroreand grossborrowingataround~6 lakhcrore,aboutthesameas thecurrentfinancialyear.

SiddharthaSanyal,India economistforBarclays,estimatesthenetborrowingtobe ~4.25lakhcroreandgrossborrowingat~6lakhcrore,after adjustingfortheswitch.He expectsafiscaldeficitat3.3per cent of the gross domestic product(GDP).

StateBankofIndia’sgroup chief economist, Soumya KantiGhosh,expectsgross borrowingat~5.8lakhcrore andnetat4.05lakhcrore,ona fiscaldeficitof3.4percentof theGDPandtaxrevenueof ~13.7lakhcrore.

“Afteraccountingforother liabilities,weestimatenetborrowingsthroughdatedsecuritiesat~4.4lakhcrore.After accountingforsomemorebuybacks/switchesintheremainingpartofFY17,weestimate redemptionsfornextyearat around ~2 lakh crore. This impliesagrossborrowingnumberforFY18at~6.4lakhcrore, higherthan~5.8lakhcrorein FY17,”wrotetheIDFCBank chiefeconomistinhisreport.

Thebondmarketisnotso worriedabouttheCentre’sborrowingprogrammethistime. Whattheyareconcernedis howthestategovernments would borrow. State DevelopmentLoans(SDLs), anothertermforbondsissued bystates,aregettingtoohuge forthemarkettoabsorb,say observers.Theexactamount ofthesearedifficulttogauge, asvariousstatesprovideestimates at different times. Worse,theydon’tsticktotheir plansandgoonborrowing morethanplanned.

Earlier,SDLswereusedto be about one third of the Centre’sborrowingbuthave sincebecomealmostequalto the latters net borrowing. Stateshavealreadyborrowed about~3lakhcrorefromthe marketonanetbasis.Bythe end of the financial year, March31,thiscouldtouch~3.5 lakhcrore.Thisiscrowdingout privatedemand,saybondmarket participants. They fear worse with demonetisation andtheresultingrevenueloss.

“Borrowing by the central government has been stable, where as borrowing by states have increased substantially. This year,net borrowing by states can come closer to that of the Centre.So,the critical element is states borrowing, where market participants might nothaveclearviews, owingtoabsenceofproper borrowingdetailsatthestarting of the fiscal,” said SoumyajitNiyogi,associate directoratIndiaRatingsand Research.“Highstateborrowingcanexertpressureonthe corporatebondcurve,disallowingfurthersoftening.
Business Standard New Delhi,27th January 2017

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