Fin Min unlikely to change borrowing plan for second half of FY24

The government's market borrowing is an important determinant of interest rates for the rest of the economy

The Ministry of Finance is unlikely to change the government's borrowing plan for the second half of FY24 and raise Rs 6.55 lakh crore as per the schedule announced in late March. However, it could reduce the number later in the year if revenues and other sources of deficit financing provide the room to do so, persons in the know told Moneycontrol.

The central government plans to borrow a record Rs 15.43 lakh crore on a gross basis through the sale of bonds in 2023-24. Of this, Rs 8.88 lakh crore is being borrowed in the first half of the year.

The borrowing schedule—the government sells bonds every week to finance the majority of its fiscal deficit—for October 2023-March 2024 will be announced by the end of September. Officials from the finance ministry and the Reserve Bank of India (RBI) will likely meet in the last week of September to decide on the borrowing calendar for the next six months.

The government's market borrowing is an important determinant of interest rates for the rest of the economy. If the government borrows a lot, it reduces the funds available to companies and pushes up borrowing costs. As such, any cut in the government's borrowing is seen as a positive.

Keeping its powder dry

Speculation has been rife in recent weeks that the government may not borrow as much in October 2023-March 2024 as previously indicated. However, according to one of the sources, the finance ministry may not want to "send a signal" to the bond market by announcing a cut in the borrowing amount while releasing the bond issuance calendar for the second half of 2023-24 and instead take a decision on reducing this amount only later in the financial year. But a final decision on the borrowing figure will be taken at the aforementioned meeting.

"If it has to be reduced, then it can always be done later after seeing the trend in small savings collections for some more time. There will surely be no increase in borrowing from the stated amount for 2023-24," the source cited above said.

Moneycontrol reported in August, quoting a government official, that a surge in small savings collections could give the Centre room to lower its borrowings through bonds. The government funds its fiscal deficit through a mix of borrowings from the bond market, proceeds from small savings, and drawdown from cash balance.

According to a second source, given that the supply of bonds is much lower in the second half of the year, there is no real need to make changes.

"I don't think there will be any proposal to lower the supply in the second half of the year… As of now, according to me, the probability of any changes to the number that was announced at the start of the year is low," the person said, adding that it made more sense to reassess the situation later when there was more information on the government's finances.

"Let's say we announce a cut in the borrowing for the second half of the year at the end of September. And if something happens to other variables, such as GST (Goods and Services Tax) collections… Once you announce a cut in the borrowing, then if we borrow an additional Rs 20,000 crore or whatever, that's a shock we don't want to give to the market," the person added.

Also Read: Centre hopes to lower annual borrowing to Rs 12-13 lakh cr in next few years

According to a third source, the second half of the year will be "very comfortable" from a borrowing perspective on account of repayments to the tune of Rs 2.81 lakh crore for government bonds maturing in November 2023-January 2024. As such, the government will be borrowing Rs 3.74 lakh crore on a net basis and no disruptions are expected.

"Frankly, nobody will spoil the party just before the elections. Every institution will do its job," the person said.

India will likely hold national elections in the first quarter of 2024-25.

Green bonds

A portion of the Centre's borrowing in October 2023-March 2024 will be done via green bonds, which it first issued in the last quarter of 2022-23. While the government was not satisfied with the premium it received in its debut green bond sale, it may go ahead with the auction of the next tranche of these bonds in the second half of 2023-24 to the tune of at least Rs 16,000 crore, the first source said.

The Centre had an internal figure of Rs 25,000 crore for green bond issuances in 2023-24. In 2022-23, it had raised Rs 16,000 crores through these bonds.

Reports have recently emerged, citing sources, that the central government may not issue any green bonds in 2023-24 as investors are unwilling to pay the 'greenium'—the premium the issuer gets on green bonds due to the sustainable nature of projects financed by these bonds—the government wants.