H1 Borrowings

Read between the lines to get a clearer picture

When the government announced the H1 borrowing program for the fiscal year 2018-19, there was a sense of jubilation among bond traders. After all, at Rs.288,000 crore, the H1 borrowing program was nearly 20% lower than the corresponding figure of Rs.357,000 crore in the previous year. In fact, this is the lowest H1 borrowing program in the last 4 years since this government came to power. However, there are 3 things that you need to keep in mind here

Why did yields not react?

After a brief 25 basis points fall in the 10-year benchmark bond yields on the day of H1 borrowing announcement, there was not much of an impact. That is because, yields are unlikely to be impressed too much by this measure. The real impact of yield is coming from 2 factors viz. inflation and US yield risks. Both continue as before. The clarity on the monsoons will only come around June. Even otherwise, the food prices are likely to be elevated this year due to a more aggressive MSP at 150% of the cost of production. That means CPI inflation will be closer to the 5% mark through the year. Secondly, Jerome Powell of the US Fed has already indicated that the Fed may veer towards 4 rate hikes rather than 3 rate hikes this year. That opens the possibility of the RBI hiking rates by 25-50 basis points this year. That will continue to be an overhang on bond yields. The H1 is unlikely to impact yields big time!

Short term debt on the rise

There are some stark differences in the structure of the debt maturity in fiscal 2018-19. There is a predominance of debt that is below the 10 year maturity. The proportion of 1-4 year debt and the proportion of 91-day T bills are also quite high in relative terms. Now, short term debt has the propensity to create a maturity mismatch challenge for the government as it will be using a lot of these short term borrowings to fund long term causes. That could be a major issue if the rates go up as it will mean that the government will have to roll over its short term debt at higher rates. Markets are cautious about that!

Forget H1, show me the funds

The government may have reduced its H1 borrowing target but that does not in anyways change the fact that the fiscal deficit of the government is higher by 30 basis points for the next two years. It only means that more of the borrowing requirements will be funded through direct private placement with institutions or through off-balance sheet items. Both will not be viewed very favorably by the global rating agencies. The real worry for the markets could be that there could be more deals like cross holdings and higher withdrawals from the NSSF to make up for the shortfall. The lower H1 borrowings are unlikely to enthuse bond markets. At best; it could reduce the MTM losses for the current fiscal! ©

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