The bond market is expecting an improvement in yields as the fiscal deficit is likely to come down due to high revenue the government earned from the 3G and bandwidth telecom auctions held this year.
“The Budget may forecast a lower fiscal deficit of around 4.6 per cent, which would result in improvement of yields marginally,” said R V S Sridhar, head-global markets, Axis Bank.
In the current financial year, the net government borrowings have reached Rs 3.42 lakh crore as on February 18. Gross government borrowings stood at Rs 4.37 lakh crore as compared to the budgeted Rs 4.57 lakh crore. A section of the market sees government borrowings for 2011-12 not exceeding this year’s figure or perhaps coming down marginally.
“The government has surplus cash due to the airwave auction. The government may not increase its borrowings for the next financial year as compared to last year. The fiscal deficit projection may also come down on an expanded GDP base,” said an executive director of a mid-sized public sector bank. According to HDFC Securities, the upward revision of the GDP base is likely to push the fiscal deficit for 2010-11 to 4.9 per cent of GDP against the budgeted ratio of 5.5 per cent (6.3 per cent in FY10).
“This denominator effect will continue to help in FY12. However, the ratios can hide more than they reveal and what would matter, at least to the financial markets, will be the absolute level of deficit. Thus, despite a lower fiscal deficit to GDP ratio in FY11, the absolute level of the deficit is actually likely to be slightly higher than the initial projections,” HDFC Securities said.
A section of the market is also of the view that a closer look into the government’s spending and revenue options next year indicates that its dependence on the markets for funds may be higher than last year.
In addition, the windfall gain from airwave auctions was a one-off event and not be there next year. On the other hand, government spending may be higher on account of a greater subsidy bill in the wake of higher crude oil prices. “Our sense is the government is likely to announce a gross borrowing target of close to Rs 4.7 lakh crore but slippages from subsidy payouts over the course of the year could see additional borrowings of as much as Rs 30,000 crore,” said Abheek Barua, chief economist, HDFC Bank.
Higher dependence on markets to fund the fiscal deficit could be a negative for government bonds in the backdrop of the tight liquidity and the rising interest rate scenario. Also, higher borrowing may lead to the crowding out of bank lending.
