Government borrowing cost likely to fall, thanks to EPFO

Government borrowing cost likely to fall, thanks to EPFO

Borrowing costs for the Centre and the states may reduce in FY19 after India allowed the country’s biggest buyer of organized debt to buy less of corporate bonds and increase instead the allocations toward sovereign paper.

The Employees’ Provident Fund Organisation (EPFO), which manages more than Rs 10 lakh crore in superannuation funds and is India’s largest domestic buyer of debt, now needs to allocate a minimum of 20 per cent of its portfolio to corporate bonds. That threshold, earlier set at 35 per cent, has been reduced because of the lack of availability of quality corporate paper in the country.

“Based on the rates, we will take prudent and meritorious investment decision in the interest of stakeholders,” said VP Joy, the central provident fund commissioner. “We have larger limits now for government bond investments.”Two weeks ago, ET reported that the EPFO requested the Centre to alter investment guidelines applicable to it so that India’s largest debt investor could buy more state-government bonds or gsecs with money it might otherwise have had to allocate for riskier debt paper.

The EPFO now receives about Rs 12,000 crore every month from about 50 million subscribers. The Centre is slated to borrow Rs 4.07 lakh crore from the market in 2018-19. India Ratings expects the net market borrowings of the states to increase to Rs 3.7 lakh crore in FY19 from an estimated Rs 3.5 lakh crore in FY18.

The increase in investment limits for sovereign bonds could also ease the pressure in the government bond market where investors are incurring mark-to-market losses amid surging bond yields. The benchmark yield has risen about 100 basis points in the past five months. Bond yields and prices move in opposite directions.

“There will definitely be a pullback in the gsec market,’ said Lakshmi Iyer, CIO- debt & head - products, Kotak Mutual Fund. “The bond market was desperately seeking a new demand to arrest the surging yields, which will now come through expected EPFO buying.”“While corporate bond yields at the longer end would likely increase, the government bond yields are likely to dip to some extent, reversing the rising trend,” she said.

The benchmark bond yield may fall at least 10 basis points in the next few trading sessions.“The additional demand from EPFO will keep the rates under check for the state and long-end central government bonds,” said Soumyajit Niyogi, associate director at India Ratings. “State governments have been paying high rates of interest. Now they should benefit.”

State bonds are now offering 50-60 basis points higher than central government papers. For example, Maharashtra and West Bengal are yielding 8.21per cent and 8.29per cent half yearly, which are about on a par with top-rated corporate bonds.EPFO can invest 45-65per cent of its investible funds in government securities, while 20-35per cent will be allocated toward corporate bonds. The rest goes to exchange-traded funds, with a 15per cent cap.

The Economic Times, New Delhi, 26th February 2018