While the market sentiments weakened on Tuesday and witnessed a decline in the rupee against the dollar and a sharp rise in bond yields, a tweet by the secretary of the Department of Economic Affairs (DEA) Wednesday morning stating that the government’s additional borrowing requirement has been reduced from Rs 50,000 crore (stated 3-weeks ago) to Rs 20,000 crore, resulted in a sharp upward movement in equity, bond and currency markets. Even as markets witnessed a relief rally, participants raised concerns over quick change in the government’s stance that is leading to volatility in the markets.
After the tweet, while the Sensex rose from the day’s low of 34,700 to close at 35,081 (first time above 35,000) on Wednesday, the rupee recovered some of its losses incurred on Tuesday and rose 15 paise or 0.23 per cent against the dollar to close at 63.88 on Wednesday. Even the 10-year G-Sec yields firmed up by 14 basis points and closed at 7.41 per cent during the day.
The announcement from the secretary to reduce the additional borrowing came three weeks after the government had announced its final borrowing programme, where it said that it would go for an additional market borrowing of Rs 50,000 crore during the current financial year.
While the government had on December 27 announced that it would raise additional market borrowing of Rs 50,000 crore through dated government securities in the current financial year, on Wednesday, it said: “Upon a review of trends of revenue receipts and expenditure pattern, it has been assessed that additional borrowing of only Rs 20,000 crore of government securities would be adequate to meet financing needs. Government did not accept borrowings of Rs 15,000 crore in last three auctions. Remaining Rs 15,000 crore would be reduced from the notified borrowing programme of ensuing weeks.”
Other than the DEA’s Wednesday tweet, the government also announced mid-month (first time) direct tax collections data till January 15, which showed an increase of 18.7 per cent over the net collections for the corresponding period last year.
Only last week, on January 9, the government had announced the direct tax collections numbers till December 31, 2017. It said that the net collections till December were up by 18.2 per cent over the corresponding period last year.
While a government source told that on Tuesday, several senior finance ministry officials held a meeting to assess the state of government finances and the revenue situation, the sudden change in borrowing programme after three weeks seems to have impacted the market sentiments. A chief investment officer (debt) with a leading mutual fund said that it is a little strange to see that the government did not know what they are going to do in three weeks after announcing their final borrowing programme. “A series of announcements today only suggest that the government is trying hard to tell the market that the fiscal position is not bad as that may bring the yields down and help them. However, it creates unnecessary volatility in the market. Market participants planned their investments based on the government’s borrowing programme and a change in the government’s plan in three weeks creates confusion,” he said.
Another bond market analyst said that while the announcement provided some relief to the market, quick change in stance is creating some confusion. “The reduction in supply of government paper is a relief for the bond market, but it also sends confusing signals since review comes within 20 days of the RBI and finance ministry announcing the final borrowing schedule,” said the analyst. He further added that the yields on bonds have spiked over 80 basis points in just over a month. “Since state-owned banks are the biggest owners of government securities, this is expected to result in banks booking massive treasury losses,” he added.
A debt fund manager with a mutual fund said that there is a growing expectation in the bond market that the Reserve Bank of India would give extra dividend to the government in the current fiscal year – over and above what has already been provided. The RBI in August announced that it will transfer Rs 30,659 crore as surplus to the government for the year ended June 2017, less than half the amount transferred last year. For the year 2015-16, the RBI board had approved the transfer of surplus amounting to Rs 65,876 crore to the government. “Unless RBI provides extra dividend and the non-tax revenues (from sources such as disinvestment) is higher than anticipated, attaining the fiscal deficit target of 3.2 per cent is challenging,” he said.
On Wednesday, G-Sec prices on Wednesday recovered and yields came down after the government announced a reduction in the borrowing programme. The 6.68 per cent government security maturing in 2031 climbed to Rs 93.06 from Rs 91.85 previously, while its yield eased to 7.50 per cent from 7.65 per cent.
The benchmark 10-year bond yield fell the most in the last 14 months. The 7.17 per cent government security maturing in 2028 went up to Rs 99.63 from Rs 98.51 previously, while its yield slid to 7.22 per cent from 7.38 per cent. The 6.79 per cent government security maturing in 2027 gained to Rs 95.83 from Rs 94.9475 previously, while its yield moved down to 7.42 per cent from 7.55 per cent. “The reduction in borrowings will cool down the bond market,” said a dealer. On Tuesday, bond prices tumbled and yields rose sharply adding to the nervousness in the bond market after Reserve Bank of India Deputy Governor Viral Acharya warned that the bond market risk of banks “cannot be managed over and over again by their regulator”.