Updated: January 2, 2020 4:30:57 am
Large fiscal slippages notwithstanding, both the central and state governments have seen a sustained fall in their cost of borrowings in the past one year.
On Tuesday, the last day of 2019, four states — Gujarat, Madhya Pradesh, Rajasthan and Goa — raised a total of Rs 4,881 crore by issuing 10-year bonds at a weighted average interest rate of 7.17 per cent. This was lower than the 8.08 per cent yield for the same tenor of state development loans floated a year ago.
When compared to the 8.76 per cent rate as on September 25, 2018, the cumulative fall in the borrowing cost of 10-year loans of states works out to nearly 159 basis points (bps), which is more than the 135-bp decline in the Reserve Bank of India’s (RBI) benchmark repo or overnight lending rate in 2019. During the same period, the average cost of 10-year borrowings of the Centre has also come down from 8.04 per cent to 6.62 per cent. This drop of over 142 bps is again higher than the fall in the repo rate.
The chart, however, shows that the fall in the cost of borrowings for both the Centre and the states was largely until around July. Between September 2018 and July 2019, the RBI had cut its repo rate from 6.5 per cent to 5.75 per cent. Subsequent to that, the central bank slashed the benchmark rate further to 5.15 per cent, but that has not led to a reduction in government borrowing costs. The latter had, in fact, started falling even before the RBI had embarked on its policy rate cuts from February 2019.
The flattening of interest rates on government borrowings — secondary market yields on the 10-year Government of India bond have actually risen from 6.33 per cent to 6.56 per cent from mid-July to end-December — has been mainly due to fiscal slippages from falling tax revenues.
The Centre’s fiscal deficit for April-November stood at Rs 8,07,834 crore, which was higher than the Budget Estimate (BE) of Rs 7,03,760 crore for 2019-20. The Centre has so far raised Rs 6,30,394 crore out of its total budgeted market borrowings of Rs 7,10,000 crore. The expectations of the fiscal deficit exceeding the BE, thereby necessitating more borrowings, is what is being seen as not allowing yields to come down further. States too are experiencing fiscal stress on account of lower goods and services tax (GST) collections, which might require them to issue fresh debt that is again preventing interest rates from going down.
In the meantime, the RBI has launched open market operations (OMO) programme of purchasing longer term (10-year) government securities and selling those of shorter tenor (one-year) paper. This programme, also called ‘Operation Twist’, is aimed at “flattening” the yield curve by reducing the interest rates on long term bonds vis-à-vis short term. But two rounds of such auctions on December 23 and 30 have not had the desired impact yet.
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