G-sec Issuance Mix Changes: Out of the total borrowings of INR6.06 trillion budgeted for FY19, the government proposes to raise INR2.88 trillion in 1HFY19. Within the maturity buckets of proposed issuance, the government has introduced one-to-four years' bucket and indicated plans to issue more floating rate bonds and introduce retail inflation indexed bonds. The government announced that nearly 10% of the issuances could be through these floating rate bonds and inflation indexed bonds. These measures are aimed at creating a better demand-supply match in the debt market.
Tweak in Maturity Profile to Target Investors: Historically, the government has, on an average, borrowed 58%-59% of the full year's borrowing in 1H. This proportion has been brought down to 47.6% in 1HFY19, with one-third of issuances targeted through bonds maturing in less than 10 years and 22.6% of borrowings targeted through bonds maturing over 20 years. This borrowing distribution across various maturity buckets will make shorter tenor G-sec attractive to mutual funds and foreign portfolio investors. At the same time, longer tenor securities will be attractive for insurance companies. Ind-Ra expects the Reserve Bank of India to increase foreign portfolio investors' investment limits in debt market in the near term.
Redemption Pressure to Surge: The change in the central government's fiscal deficit financing pattern - INR250 billion increase in funding from small savings will have an impact on the entire year's market borrowing. The government has also proposed to reduce the buybacks for the year by INR250 billion. While the move to introduce a short-term bucket is targeted to reduce interest cost and augment participation in the secondary market, it is likely to elevate redemption pressure over coming two-three years. Between FY19-FY21, the annual redemption of central government securities (G-sec) ranges between INR1.63 trillion-2.5 trillion compared to average INR1.4 trillion during FY14-FY18. Increased issuance in the one-to-four years' bucket is likely to aggravate this pressure.
Positive Implication for Debt Market: The uncertain interest rate trajectory due to domestic factors such as the impact of fixing of minimum support prices at 1.5x of the cost of production and monsoons on inflation and exacerbated by ongoing global risk off sentiment, weighed down debt market over the past months, leading to a weakness in the domestic appetite. The government's 1HFY19 borrowing calendar mitigates the supply pressure anticipated by markets. This is likely to have a positive impact on the bond market trajectory in the short term. The possibility of overall reduced market borrowing size coupled with the government's readiness to explore the option of resorting to cash management bills and ways-and-means advances to finance fiscal deficit will bring cheer to the bond market. Ind-Ra, however, highlights that this needs to be looked at in conjunction with the possibility of high market borrowings in 2HFY19 along-with concerns surfacing over potential fiscal slippages and a higher-than-expected inflation trajectory. Ind-Ra, therefore, continues to maintain its outlook that benchmark 10-year G-sec is likely to average 7.5%-7.6% in FY19, while the Reserve Bank of India is likely to stay in a pause mode.
Powered by Capital Market - Live News