Synopsis: High government borrowing can cut private sector access to capital making India’s vision of a USD 5 trillion economy not achievable. Individual savings can help absorb the borrowing through retailisation of the Gsec market. Reading time- 3 minutes
A study of the ownership pattern of Gsecs indicate that banks are becoming a less dominant force in the bond market, with insurance companies and RBI taking up the slack in banks fall in demand for government bonds. The borrowing levels of both the center and states are at the highest levels on record and it is unlikely that borrowing levels will come down going forward even if fiscal deficit can come down.
Capital creating is important for economic growth and with India wanting to more than double its GDP to USD 5 trillion in the next 4 years, private sector access to capital should be unfettered. Government borrowing should not constraint access to capital by the private sector.
Domestic savings can help absorb part of the supply of government bonds through ease of access to the government bond market. Retailisation of government bonds is a priority for both the govenrment and RBI. The retailisation process should be as easy as the UPI payment system, which is now used by Indians across the country even in the remotest of villages. This can then help individuals access the government bond market and transact in bonds,
Ownership distribution of G-secs investment
| Holdings (%) | ||||||||||
Fiscal year | Commercial Banks | Non-Bank PDs | Insurance Companies | Mutual Funds | Co-operative Banks | Financial Institutions | Corporates | FPI | Provident Funds | RBI | State Governments |
FY21(as of Dec-20) | 37.81 | 0.25 | 25.64 | 2.62 | 1.83 | 1.00 | 1.05 | 2.10 | 4.61 | 15.71 | 1.76 |
FY20 | 40.41 | 0.39 | 25.09 | 1.43 | 1.90 | 0.53 | 0.81 | 2.44 | 4.72 | 15.13 | 2.05 |
FY19 | 40.28 | 0.31 | 24.34 | 0.35 | 2.29 | 1.05 | 0.97 | 3.22 | 5.47 | 15.27 | 2.00 |
FY18 | 42.68 | 0.29 | 23.49 | 1.00 | 2.57 | 0.90 | 0.91 | 4.35 | 5.88 | 11.62 | 1.91 |
FY17 | 40.46 | 0.16 | 22.90 | 1.49 | 2.70 | 0.81 | 1.05 | 3.53 | 6.27 | 14.65 | 1.92 |
FY16 | 41.81 | 0.33 | 22.18 | 2.09 | 2.75 | 0.72 | 1.28 | 3.65 | 6.01 | 13.47 | 1.84 |
FY15 | 43.30 | 0.31 | 20.87 | 1.89 | 2.62 | 2.07 | 1.25 | 3.67 | 7.58 | 13.48 | - |
FY14 | 44.46 | 0.11 | 19.54 | 0.78 | 2.76 | 0.72 | 0.79 | 1.68 | 7.18 | 16.05 | - |
FY13 | 43.86 | 0.11 | 18.56 | 0.68 | 2.81 | 0.75 | 1.14 | 1.61 | 7.37 | 16.99 | - |
FY12 | 46.11 | 0.10 | 21.08 | 0.17 | 2.98 | 0.37 | 1.38 | 0.88 | 7.45 | 14.41 | - |
FY11 | 47.03 | 0.11 | 22.22 | 0.18 | 3.41 | 0.35 | 1.94 | 0.97 | 7.06 | 12.84 | - |
During last 10 years, commercial banks holding in government securities has declined by around 9% while holdings of insurance companies and RBI have moved up by 3% each. In the case of mutual funds and financial institutions, total investment in gilt securities have witnessed an uptrend. On the other hand, provident fund holding in gilt securities has decreased as these funds diversify investment to higher yielding corporate bonds. FPI holding has increased although it has seen a declining trend since FY18.
Government bonds, SDL and OIS yield movements.
During the week, 5.85% 2030 yield came down by 4 bps to 6.19%. 5.77% 2030 yield decreased by 4 bps to 6.36%. 5-year benchmark bond, 5.22% 2025 yield declined by 11 bps to 5.66%. 6.57% 2033 yield lost 1 bps to 6.71%. Long term paper 7.16% 2050 yield came down by 2 bps to 6.92%.
The spread of 10-year bond over 5-year bond (5.22% 2025) rose to 53 bps from 46 bps in previous week. The 15-year benchmark over 10-year benchmark spread rose to 52 bps from 49 bps while 30-year benchmark over 10-year benchmark spread decreased to 64 bps from 72 bps.
In the SDL auction conducted last week, average 10-year SDL yield stood steady at 7.15% from 7.16% during previous week. The spread with G-sec benchmark remained unchanged at 97 bps.
On weekly basis, 1-year OIS yield came down by 10 bps to 3.84% while 5-year OIS yield declined by 14 bps to 5.20%.
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