The nominal GDP growth of 6.1% for the second quarter of fiscal 2019-20 against the projected growth of 11.5% throws the government’s fiscal math for a huge toss. The government saw fiscal deficit at 102% of the full year target in the April-October period with direct tax revenues growing at 2% against 11% projected. The full impact of the big bang corporate tax rate cut effected in September 2019 is yet to be seen in the direct tax numbers and this will add a hole of Rs 1.45 trillion in direct tax collection, making the growth negative in the coming months. GST collections have faltered in the last few months coming in below Rs 1 trillion monthly against projected levels of around Rs1.1 trillion.
Real GDP grew by 4.5%, a six year low, and there is clamour from economists for the government to fiscally pump prime the economy. RBI is expected to extend its rate cuts in its policy review on the 5th of December but that will not have a large impact on pushing economic growth given the lack of transmission of policy. Low economic growth is fueling more defaults, largely corporate defaults but with job losses the retail defaults could also rise. Lenders will turn more credit risk averse on rising defaults. Bank credit growth fell to 8.08% as of 8th November 2019 against double digit growth levels seen a few months ago.
The government is not even a quarter of the way to meet its full year disinvestment target of Rs 1.05 trillion and is looking to privatise BPCL to achieve its target but the process is a race against time.
Given the fiscal hole and the need for further fiscal stimulus, government borrowing may balloon and this will lead to huge supply of bonds. Higher fiscal deficit will hit the INR and even if global bonds are issued, the cost will be high.
Bond markets will brace for supply and this will tell on bond yields even if RBI cuts rates and stays accommodative.
The benchmark 10-year bond, the 6.45% 2029 bond, saw yields come down by 3 bps to 6.47% on a weekly basis. The benchmark 5-year bond, the 6.18% 2024 bond, yield rose by 2 bps to 6.19% and the 6.68% 2031 bond yield declined by 2 bps to 6.91%. The long tenure bond, the 7.63% 2059 bond, yield decreased by 1 bps to 7.17% levels.
One-year OIS yield declined by 3 bps to 5.01% while the five-year OIS yield increased by 3 bps to 5.09% 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 Rs 2634.1 billion as of 29th November 2019. Liquidity was in a surplus of Rs 2114.74 billion as of 22nd November 2019.
