MC Explains | Why the Centre lowered its market borrowing

The Union government has slashed its market borrowing through bonds for the current financial year by Rs 10,000 crore to Rs 14.21 lakh crore as borrowings have hit a record high.

As part of its second-half borrowing, the Centre will also sell sovereign green bonds worth Rs 16,000 crore.

Moreover, with redemptions in the second half of this financial year amounting to Rs 85,380 crore, the net borrowing for the second half amounts to Rs 5.1 lakh crore.

What are the reasons behind the lower borrowing target?

Borrowings are already at a record high

The government had initially announced borrowings to the tune of Rs 14.95 lakh crore for the financial year in the February 1 budget.

However, this borrowing was effectively scaled down to Rs 14.31 lakh crore due to a switch operation that happened days before the budget.

Even after the latest cut, the borrowing is still at its highest ever, as the Centre’s balance sheet had ballooned since the pandemic.

In recent weeks, Indian bond yields have moved in a relatively orderly manner amid expectations about inclusion in global bond indices. On the other hand, globally, bond yields have been volatile with the US Federal Reserve talking about sharp rate hikes, going ahead.

A prudent cut in India’s borrowings at this point of time ensures that the rate of borrowings for both the government and corporate sector will not face further upward pressure.

Deft budget management

Over the last couple of years since the pandemic, the Centre has cleaned up its balance sheet by declaring, and wherever possible, paying off its extra-budgetary liabilities.

The government’s budget estimates have also turned conservative as opposed to being too optimistic previously.

This means, if the economic situation turns out to be good, revenues are aplenty, meaning the government will be able to avoid giving the market bad news in the form of higher borrowings.

So far this year, the revenue figures give cause for optimism. Yes, Bank’s Indranil Pan expects full-year receipts to exceed budget estimates by Rs 1.6 lakh crore with direct and indirect taxes likely exceeding budget estimates by Rs 2 lakh crore and Rs 80,000 lakh crore, respectively.

The government will also have a buffer from likely higher collections under small-savings schemes, the rates for which have been raised for October-December.

Preparing for headwinds

The government is also cognizant of the fact that despite a global economic slowdown, interest rates are likely to keep heading higher for some time as central banks seek to curb red-hot inflation.

The Reserve Bank of India (RBI) has again raised the repo rate by 50 basis points and it is expected to raise rates again in December. An onslaught of more borrowings would have made life tough for the government’s debt manager at a time when it is also fighting to defend a slumping currency.

The RBI has been appreciative of the government’s conservative fiscal stance since the start of the pandemic.

With inflation not projected to come off to the central bank’s target of 4 percent for another two years, the government will need to continue to do the balancing act on the budget.