Bond Market Snapshot For The Week
· Government borrowing likely to shoot up in the next fiscal year
· 10-year benchmark bond, 6.45% 2029, yield declined by 5 bps to 6.58%
· 5 year OIS yields came down by 9 bps to 5.53%
· Liquidity continues to be in a huge surplus of Rs 3.60 trillion
Total government borrowing Central plus State Governments, could be over Rs 16 trillion in fiscal 2020-21, growth of over 20% year on year.
The bond market is staring at a deluge of supply from the central and state governments in fiscal 2020-21, as they adopt a borrow and spend budget to boost economic growth. The first year of decline in direct tax collections in 20 years in fiscal 2019-20 on the back of corporate tax rate cut and a sharp slowdown in nominal GDP from 11.5% budgeted levels to 7.5% levels has curtailed the government’s ability to cut taxes further to boost growth. Direct tax collections are expected to decline by 4% from last year’s levels and over 20% from budgeted levels.
The central government is expected to raise fiscal deficit to 4.5% of GDP from levels of 3.6% to 3.8% of GDP (final numbers to be in this range) for this fiscal year. Assuming a 12% nominal GDP growth, fiscal deficit at 4.5% of GDP for fiscal 2020-21 is likely to be at around Rs 10 trillion.
If the government borrows to fund the fiscal deficit, at 65% of total fiscal deficit (the rest 35% funded by small savings), net borrowing is pegged at around Rs 6.5 trillion, which is 40% higher from this year’s net borrowing.
Reports indicate that the government could use off balance sheet borrowing to reduce direct net borrowing, but even then it does not take away overall supply from the market.
The states too will add on to supply and could borrow 25% over and above their net borrowing of around Rs 4.5 trillion for this year.
On a gross basis, government will have to borrow to fund redemptions of around Rs 2 trillion and states Rs 1.4 trillion, which adds on to total supply.
Government would have to tap global bond markets and the RBI to take up part of the supply, as the domestic bond market may not have the capacity to absorb the supply on its own without taking up bond yields substantially.
The benchmark 10-year bond, the 6.45% 2029 bond, yields decreased by 5 bps to 6.58% on a weekly basis. The benchmark 5-year bond, the 6.18% 2024 bond, yield came down marginally by 1 bps to 6.39% while 7.17% 2028 bond yield decreased by 6 bps to 6.82% and the 6.68% 2031 yield level declined 4 bps 6.89% on a weekly basis.
One-year OIS yield came down by 5 bps to 5.32% while the five-year OIS yield declined by 9 bps to 5.53% on a weekly basis.
System liquidity as measured by bids for Repo, Reverse Repo, Term Repo and Term Reverse Repo in the LAF (Liquidity Adjustment Facility) auctions of the RBI and drawdown from Standing Facility (MSF or Marginal Standing Facility) was in surplus of Rs3601 billion as of 24th January 2020. Liquidity was in a surplus of Rs 4326 billion as of 17th January 2020.