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The government has announced a gross borrowing plan of Rs 6.3 lakh crore for 2013-14, which is Rs 30,000 crore higher than Street expectation. The net borrowing plan is Rs 4.8 lakh crore.
The fact that despite announcing lower fiscal deficit projection for the next fiscal, the gross borrowing number is higher by 12% as compared to about Rs 5.6 lakh crore estimated for 2012-13. This has baffled many on the Street.
“One of the intended benefits of a smaller fiscal deficit is lower borrowing in any economy. Unfortunately, that does not seem to be the case for India. This is clearly a negative surprise for the bond markets,” said Vivek Rajpal, fixed income strategists, Nomura. Fiscal deficit for 2013-14 is pegged at 4.8% as compared to 5.2% of current year.
The yields on the 10-year benchmark government bonds shot up 7 basis points on Thursday to close at 7.87%. Bond traders expect 10-year benchmark bond yield to range 7.8-7.9% till the next monetary policy review.
However, a section of market expects that RBI will put greater emphasis on the government’s intention to cut the twin deficits for policy making purpose than absolute borrowing numbers.
“The Budget has taken significant steps for keeping the fiscal deficit down and the challenge of the subsidies is being met. In both 2012-13 and 2013-14 the numbers indicate that the government expenditure and borrowing is being brought down. Overall that's a good thing,” said Urjit Patel, deputy governor of RBI who looks after the monetary policy department, in his reaction to the Budget.
Patel said the net market borrowing is manageable and the RBI would be in a position to manage this task while adding that buyback of Rs 50,000 crore worth of securities will help in consolidation of the debt.
“The monetary policy implications of the Budget will be addressed next month,” Patel said.
RBI, which has been conducting open market operation (OMOs) to infuse liquidity by buying bonds, may continue to do so if liquidity remains tight. According to HR Khan, deputy governor of RBI, the decision to conduct OMOs will depend on liquidity and not on the borrowing numbers.
The central bank has reduced interest rate in its January policy review by 25 basis points, which was for the first time in nine months, but expressed concerns on the widening current account deficit and high fiscal deficit.
Today, the finance minister, while acknowledging high CAD is a “greater worry”, announced inflation indexed bonds (IIB) to discourage gold demand. The country’s high gold imports are seen as a significant factor for the large CAD, and the demand for non-financial investments are rising due to high inflation.
“IIBs are good hedging instruments against inflation. This would also help towards addressing the CAD risks in the economy as high gold imports in recent years have contributed significantly to a widening of the CAD. IIBs also signal a credible commitment of the government to lowering inflation,” Patel said.
