Central govt's H2 borrowing plan in line with bond market expectations

The central government's plan to borrow Rs 6.61 trillion in the second half of the current financial year (H2FY25) through the issuance of dated securities is in line with market expectations, bond market participants said, adding that the borrowing calendar is consistent with the budgeted amount, featuring only minor adjustments in the distribution across various tenures.

Despite subdued demand in the first half, the government will borrow Rs 20,000 crore through sovereign green bonds (SGrBs).

“Out of gross market borrowing of Rs 14.01 trillion budgeted for 2024-25, Rs 6.61 trillion (47.2 per cent) is planned to be borrowed in H2 through issuance of dated securities, including Rs 20,000 crore of Sovereign Green Bonds (SGrBs),” the finance ministry said in a statement on Thursday.

 

As the bond market was expecting an adjustment across tenure, it led to the fall in yields on the benchmark bond to more than two-and-a-half-year low on Thursday. The benchmark yield settled at 6.72 per cent, lowest since February 21, 2022.

“The borrowing is the budget amount because they cancelled Rs 10,000 crore worth of green bond issuance in the first half. There has been adjustment in the distribution with more borrowing through the long term as compared to the short term. Because of the less supply in the short term, the yield curve will steepen a bit,” said Vikas Goel, MD & CEO, PNB Gilts.

“The long term supply will be absorbed because there is demand from pension funds and insurance companies,” he added.

The gross market borrowing will be conducted through 21 weekly auctions across securities with maturities of 3, 5, 7, 10, 15, 30, 40, and 50 years. The borrowing allocation, including sovereign green bonds (SGrBs), is spread as, 5.3 per cent in 3-year, 10.6 per cent in 5-year, 7.6 per cent in 7-year, 24.8  per cent in 10-year, 13.2 per cent in 15-year, 12.1 per cent in 30-year, 15.9 per cent in 40-year, and 10.6 per cent in 50-year securities.

“The market was not expecting a supply cut but there were expectations of redistribution, that’s why the yields fell,” said a dealer at a primary dealership.

The share of borrowing under different maturities in the first half was distributed as three-year (4.8per cent), five-year (9.6 per cent), seven-year (8.8 per cent), 10-year (25.6 per cent), 15-year (13.86 per cent), 30-year (8.93 per cent), 40-year (19.46 per cent), and 50-year (8.93 per cent).

Meanwhile, a section of the market was expecting a slight supply cut, which further weighed on the yields.

“Government securities market is factoring in all sorts of positives, expecting the Fed to continue with large-sized rate cuts and a dovish RBI policy outcome, which may even lead to a change in stance. Additionally, considering subdued government spending and buoyancy in tax collections, the market was expecting a small cut in borrowings for the second half of the year,” said V R C Reddy, head of treasury at Karur Vysya Bank.

Additionally, the government plans to borrow Rs 2.47 trillion through the issuance of treasury bills. A total of Rs 19,000 crore will be raised over 13 weeks, with Rs 7,000 crore allocated to 91-day Treasury Bills (DTBs), Rs 6,000 crore to 182-day DTBs, and Rs 6,000 crore to 364-day DTBs.