When the central government goes around with a hat in hand, it is usually questionable whether it can negotiate, much less, secure cheaper loans. This time around, however, the central government has engineered a coup. Take this: it will be borrowing over 60 percent of its fund requirement for the entire fiscal year at one go. While this shouldn’t be surprising as borrowing from bond markets has been front-loaded in the first half, what is remarkable though is that the government has shifted to 20-year bonds. The earlier tradition of bonds with a ten-year yield has been shelved and how.
Explaining the switch in the open market borrowing, Economic Affairs Secretary Shaktikanta Das said the idea is to elongate the maturity profile and also to undertake it in the most non-disruptive manner.
The government will be borrowing Rs 3.72 trillion which will be spread across 24 transactions, and a key part of it will be in 20-year bonds.
Currently, the maturity profile of all G-Secs (government securities) is about 10.5 years. The next year’s G-Secs which are going to be auctioned will have a maturity profile of 14.7 years, he added. Around one-fifth of the borrowing will be done in longer-term bonds.
For a government which is doing most of the heavy-lifting to push the economy forward, low-cost funds with an extended tenure will be helpful. In that sense shifting to a higher maturity borrowing is a step in the right direction.
Raising money for the government will not so much be an issue as banks are flush with liquidity. The general perception is that banks are not lending on account of the high levels of toxic assets they are sitting on. However, a Moneycontrol article pointed out that high quality clients have moved out of the banking system and prefer to borrow from the bond market directly.
The Indian bond market has seen increased activity over the last 2 years which has worked out to be a good source for lower-cost funds. Banks have been reluctant to pass on the rate cuts announced by RBI and had artificially kept the rates higher to garner profits which could be used to mitigate the losses on account of its toxic assets.
Share of bond market in corporate financing has now risen to 32 percent as compared to 22 percent a year ago. Bond issuances have touched Rs 5.5 lakh crore growing at 21 percent and for the second consecutive year, it has surpassed bank credit disbursements which stand at around Rs 3.1 lakh crore. Ironically, banks, too, prefer to raise low-cost funds from the bond market.
On the other end there is a good appetite for these bonds both among domestic players as well as international ones. FIIs have already bought USD 3.58 billion worth of bonds and given the liquidity globally there is a good demand for high quality paper, even the longer maturity ones. Further, retirement funds and insurance companies prefer to park their funds in higher tenure bonds.
The RBI has helped FIIs by keeping interest rates higher and changing its stance from accommodative to neutral. This has made the cost of borrowing higher for the government, which is where its strategy of lengthening the maturity profile will help. But the move also gives us a hint that government has reconciled with the central bank moves and interest rates are unlikely to come down anytime soon. Also, the pressure on government finances will reduce with higher tenure bonds.