With the central government agreeing to borrow Rs 1.1 lakh crore from the market and extend it as loans to state governments in lieu of GST shortfall, the bond market expects further flattening of the yield curve and reduced uncertainties at a time when the governments and corporates are set to mobilise a record amount from the market.
The RBI has already assured that the borrowing programme of the Centre and states for the rest of 2020-21 will be completed in a non-disruptive manner without compromising on price and financial stability. A day later after the government decision, the Reserve Bank on Friday said it will conduct Open Market Operations (OMOs) in State Developments Loans for the first time. The yield on benchmark 10-year government bonds closed at 5.93 per cent on Friday, well below the 6 per cent level.
The Rs 1.1 lakh crore borrowing would not increase the central government fiscal deficit and would also not result in an increase in combined centre and state government issuance for this fiscal, according to IFA Global Research. The government was initially reluctant to borrow from the market to meet the GST shortfall. However, the Reserve Bank of India (RBI) favoured the central government borrowing from the market as the investors were more comfortable with the Centre’s borrowing and interest rate on centre’s securities are much lower.
Central bank assurance on borrowing
The RBI has already assured that the borrowing programme of the Centre and states for the rest of 2020-21 will be completed in a non-disruptive manner without compromising on price and financial stability.
“This step will reduce the supply of state bonds in H2 FY2021, from the level that was earlier being anticipated. Moreover, the cost of such borrowings would go down. In conjunction with the plan to conduct OMO in SDL that has been announced by the RBI, such measures should help ease SDL spreads,” said Jayanta Roy, Senior Vice-President and Group Head, ICRA.
Siddhartha Sanyal, chief economist and head–research, Bandhan Bank, said, “Given the persisting revenue shortfall of central and state governments, additional market borrowing is not a major surprise. Thus, irrespective of the market’s knee jerk reaction on Friday, one feels that the current set of announcements will eventually help reducing uncertainties and anchor market sentiment over the coming weeks, especially given the intelligent selection of the maturity buckets for the additional borrowing that enjoy strong demand.”
Sanyal said the current set of announcements may also lead to further flattening of the yield curve, thereby inducing better transmission of the RBI’s monetary easing.” The RBI has decided to conduct a purchase auction of SDLs under OMO for an aggregate amount of Rs 10,000 crore on October 22, keeping in view that this is the first ever OMO purchase of SDLs. Depending on market response, the size of the auctions may be enhanced in the subsequent auctions.
While unveiling the monetary policy recently, RBI Governor Shaktikanta Das said the RBI stands ready to undertake further measures as necessary to assure market participants of access to liquidity and easy financing conditions. Notwithstanding an augmented market borrowing programme for 2020-21, the issuances for the first half of the year have been seamlessly managed both for the Centre and the states.
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