Explaining government borrowing: A guide to central and state bond markets

MC Explains

In addition to tax revenues, both central and state governments resort to borrowing from the market to address their expenditure requirements and facilitating the bridging of fiscal deficits. If you're curious about how these governments access funds from the market, here's a breakdown.

How do governments secure funds?

The Union government secures funds by issuing government securities, commonly known as G-secs, and treasury bills, classified as capital receipts in the budget. Similarly, state governments raise capital through bonds termed state development loans (SDLs) that, akin to G-secs, fulfil statutory liquidity ratio (SLR) requirements and serve as collateral for market repo transactions.

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When do governments announce borrowing plans?

The central government unveils its gross and net borrowing figures at the time of presenting the budget, with borrowing activities commencing annually from April. Additionally, treasury bill auctions are announced quarterly by the central bank. State governments, likewise, reveal their borrowing calendars for each quarter.

How is the auction process carried out?

Weekly auctions are conducted for both central and state government securities. SDL auctions occur every Tuesday, while G-sec auctions take place on Fridays. Treasury bill auctions are scheduled for Wednesdays.

Who oversees the borrowing programme?

The central government's borrowing programme is overseen by the Department of Expenditure, a segment of the Ministry of Finance, in collaboration with the Reserve Bank of India (RBI), determining the extent of government borrowing.

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What are the current bond yields?

The 10-year benchmark government security, 7.18 percent 2033, is presently trading at a yield of 7.0550 percent, representing the most liquid bond in the G-sec market. Typically, when the outstanding amount of a bond reaches Rs 1.5 lakh crore, the RBI issues a new benchmark bond.

Moreover, the weighted average cut-off yield on 10-year SDLs stands at 7.44 percent. Similarly, the cut-off yield for treasury bills is recorded at 6.9594 percent for 91-day bills, 7.1673 percent for 182-day bills, and 7.1199 percent for 364-day bills.