Govt likely to borrow more in FY14

Market sees gross borrowing at Rs 6,00,000 cr in FY14; may put pressure on bond yields

With the country likely to go for the general elections in early 2014, market participants expect the government to borrow more in 2013-14, compared with the current financial year. As a result, sovereign bond yields might rise in the first half of the next financial year (April-September), and the pressure on yields can only be countered if the central bank decides to lower the key policy rate.

The gross government borrowing for the current financial year was Rs 5.7 lakh crore, and many experts expect it to be about Rs 6 lakh crore for FY14. The figures will be announced in the Union Budget on February 28.

“I am expecting the gross market borrowing in FY14 to be in the vicinity of Rs 6 lakh crore. Due to this, in the April-September period, government bond yields will underperform at the shorter-end of the rate curve,” said Suyash Choudhary, head-fixed income, IDFC Mutual Fund.

According to Choudhary, a positive trigger will be further repo rate cuts. But countering that will be the initial supply pressure by way of government bond auctions in the range of Rs 15,000-16,000 crore a week.

The yield on the 10-year benchmark bond 8.15 per cent 2022 ended at 7.92 per cent on Tuesday, compared with the previous close of 7.94 per cent. It is expected that by March the yield will fall further. “We will not have the supply of government bonds after February 22 to March-end due to which the yield should be about 7.75-7.80 per cent sometime in March,” said Dwijendra Srivastava, head of fixed income, Sundaram Mutual Fund.

However, the fall in yields is seen as a temporary phenomena due to demand-supply mismatch of government bonds in FY14. “Demand supply mismatch may remain, which may be addressed by open market operation purchase of government bonds. This may further open up foreign institutional investors’ limit or allow more players in the government securities market,” said Srivastava. According to Srivastava, expectation of a higher gross domestic product (GDP) growth next financial year and in order to keep the fiscal deficit lower, in gross terms the government’s market borrowing will be slightly higher.

RBI has recently cut the FY13 GDP growth projection to 5.5 per cent. In July 2012, it had projected a growth of 6.5 per cent, but lowered it to 5.8 per cent three months later, as investment demand slowed, consumption spending moderated and export performance eroded. For the current financial year, the government is confident of keeping the fiscal deficit at 5.3 per cent of GDP.

But, few also expect the gross market borrowing, to be announced in the Union Budget, to be lesser than that of this financial year. “Due to expectation of the government to keep the fiscal deficit at 4.8 per cent of GDP next financial year, the government’s borrowing is likely to come down. However, the sustainability of fiscal deficit at 4.8 per cent needs to be seen over a period of time. The gross market borrowing may be Rs 5.5 lakh crore,” said S Srinivasaraghavan, executive vice-president and head-treasury, Dhanlaxmi Bank.