Interim Budget 2024: Market borrowing likely to remain in the Rs 15-16 lakh crore range, say experts

Interim Budget 2024

In the Interim Budget 2024, Union Finance Minister Nirmala Sitharaman may announce around Rs 15 lakh crore to Rs 16 lakh crore of gross market borrowing, which is almost the same announced last year and a smaller portion of this will include green bonds, according to experts.

The borrowing cost for the government in the next fiscal year is likely to be in its favour due to expected demand from foreign investors for these securities after the inclusion of Indian government bonds on JPMorgan's global indices starting in June, and maybe even Bloomberg's indices starting September.

Experts think that gross market borrowing will remain in the range of Rs 15-16 lakh crore for the next financial year 2024-25. Similarly, net borrowing is pegged between Rs 11.50 lakh crore and Rs 11.75 lakh crore.

“As per the glide path, the fiscal deficit should be around 5.40 percent, which would translate to gross borrowing of Rs 15 lakh crore,” said Abhishek Bisen – Head of Fixed Income, Kotak Mutual Fund.

Shantanu Godambe, VP- Investments, DSP Mutual Fund said net borrowing will be around Rs 11.50-11.75 lakh crore.

In FY24, the Centre announced gross market borrowing of Rs 15.43 lakh crore. This was 8.6 percent higher compared to what was borrowed in 2022-23.

The Interim Budget for 2024-25 will be presented by Finance Minister Nirmala Sitharaman on February 1. Notably, this will be the sixth consecutive presentation of the Budget for the finance minister.

In an election year, the government presents only an Interim Budget or seeks a Vote on Account and leaves it to the next government to present the full budget.

The government's borrowing is among the most important determinants of interest rates in the economy. Higher-than-expected government borrowings can push up rates for all bond issuers — sovereign and corporate — while interest rates can decline if the government tightens its belt and borrows less than anticipated.

Borrowings are loans taken by the government to fund its spending on public services. Usually, the government borrows the money through securities such as government securities and Treasury bills.

“We expect the budget to continue to be capex-oriented and rural-focused with meaningful investments towards green energy and critical sectors like defence, railways, roads, among others,” said Anurag Mittal, Head of Fixed Income, UTI AMC.

Government will continue on the fiscal consolidation path

Will it be a front-loading package?

Experts believe that in the next financial year, government borrowing will be front-loaded. This means 50-60 percent of the total borrowing will be raised in the first half of the financial year, which allows state governments and corporate entities to raise more money in the second half.

“Consistent with previous years, we anticipate that 57-60 percent of the borrowing will occur in the first half of the next financial year,” Godambe said.

Moreover, Mittal from UTI AMC said the government may not be able to spend on new projects meaningfully as the model code of conduct may kick in. However, spending on existing projects may continue.

“Hence, we expect spending to pick up meaningfully post the elections,” Mittal said.

In the current financial year also, the Union government raised a major chunk of its borrowing in the first half. It raised Rs 8.88 lakh crore in the first half of FY24.

The balance amount of Rs 6.55 lakh crore was planned to be raised through government securities in the second half of 2023-24, with green bonds worth Rs 20,000 crore being part of the total programme.

Green bonds

Money market experts said the government will also announce green bonds as a part of government borrowing, but the size will be smaller.

“The government is already issuing green bonds in FY24 and we expect them to borrow a moderate size in FY25 as well to support climate-related projects,” Mittal said.

Adding to this, Bisen said green bonds have not been able to get the desired result in terms of leading to lower costs of borrowing. Hence, it may not be meaningfully larger than what we have done in the current financial year.

In the current financial year in the second half, the government announced Rs 20,000 crore green bonds.

Green energy sector seeks more incentives, tax relaxations

Bond yields

The government bond yield is likely to be lower in the next financial year mainly due to expected foreign inflows after bond inclusion and inline borrowings announcements, experts said.

However, Bisen said the Reserve Bank of India (RBI) may supply bonds through Open Market Operation (OMO) sales to remove excess liquidity caused by the RBI’s accumulation of the flows.

JP Morgan Chase & Co will add Indian government bonds to the JPMorgan Government Bond Index-Emerging Markets starting June 28, 2024.

“Inclusion of Indian bonds in global indices might attract $15 billion - $20 billion of flows next year, potentially causing yields to fall as more buyers chase the same amount of bonds,” Godambe said.

Moneycontrol on December 28 reported that the expected range for the 10-year benchmark government bond is 6.70-7.30 percent.

Currently, the 10-year benchmark 7.18 percent 2033 yield is trading at 7.2151 percent.