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The government has announced for 2013-14, it plans to borrow Rs 6.3 lakh crore, Rs 30,000 more than what the Street expected. Planned net borrowings stand at Rs 4.8 lakh crore.
Despite announcing a lower fiscal deficit projection for the next financial year, gross borrowings are 12 per cent higher, 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 market," said Vivek Rajpal, fixed income strategist, Nomura. (Click here for charts)
Fiscal deficit for 2013-14 is pegged at 4.8 per cent of gross domestic product, compared with 5.2 per cent this financial year. Yields on the 10-year benchmark government bond rose seven basis points on Thursday to close at 7.87 per cent. Bond traders expect till the next monetary policy review, the yield would stand at 7.8-7.9 per cent. On Thursday, the rupee fell by 50 paise to close at Rs 54.36 against the dollar, as the Budget lacked significant announcements to invite capital flows. This month, the rupee dropped 2.1 per cent, the steepest monthly fall since May 2012.
However, some market expects think for policymaking, RBI would put greater emphasis on the government's intention to cut the twin deficits, compared to absolute borrowing numbers. "The Budget has taken significant steps for keeping the fiscal deficit low and the subsidies challenge is being met. In 2012-13 and 2013-14, the numbers indicate government expenditure and borrowing is being brought down. Overall, that's a good thing," said Urjit Patel, deputy governor of RBI. Patel is in charge of the central bank's monetary policy department.
The net market borrowing was manageable, he said, adding buyback of Rs 50,000 crore of securities would help consolidate the debt. "The monetary policy implications of the Budget will be addressed next month," Patel said.
RBI may continue to conduct open market operations if liquidity remains tight. H R Khan, deputy governor of RBI, said OMOs would depend on liquidity, not borrowing numbers. In its policy review in July, the RBI had reduced the policy rate by 25 basis points. It had, however, expressed concern on the widening fiscal and current account deficits.
Today, the finance minister acknowledged a high current account deficit (CAD) was a "greater worry". To discourage the demand for gold, he announced inflation-indexed bonds (IIBs). Patel said, "IIBs would also help address the CAD risks in the economy, as high gold imports in recent years have contributed significantly to widening the CAD. IIBs also signal a credible commitment of the government to lowering inflation."
