The coalition government at the Centre is unlikely to change market borrowing numbers in the upcoming Budget in July, despite the higher dividend transferred by the Reserve Bank of India (RBI), experts said.
This is because the additional funds are likely to be utilised by the government for expenditure and maintaining fiscal deficit at the target, they added.
In the interim Union Budget 2024, the government has targeted a fiscal deficit of 5.1 percent of the GDP for 2024-25.
“We are not expecting a cut in their borrowing number in the upcoming Budget. The extra headroom from the RBI dividend could be used to increase spending while maintaining the fiscal deficit at 5.1 percent of GDP,” said Sakshi Gupta, Economist at HDFC Bank.
Similarly, Gopal Tripathi, Head of Treasury at Jana Small Finance Bank is not seeing any change in the borrowing numbers in the Budget.
The borrowing number is key since the central government finances its fiscal deficit mainly through issuing dated securities.
In the interim Budget on February 1, the central government said it would borrow Rs 14.13 lakh crore from the markets in 2024-25 in gross terms to finance its fiscal deficit of 5.1 percent of the GDP.
This was a whopping Rs 1.3 lakh crore lower compared to the estimate of Rs 15.43 lakh crore for the current fiscal, Finance Minister Nirmala Sitharaman announced presenting the Interim Budget for 2024-25.
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Borrowing cut likely
However, the net borrowing number for FY25 is only slightly lower at Rs 11.75 lakh crore compared to the revised estimate of Rs 11.80 lakh crore for the current financial year.
Meanwhile, some other experts are of the view that there could be a marginal cut in borrowings.
“I do expect a partial cut in borrowing target in the upcoming Budget in order to focus on a fiscal consolidation path. I expect a cut of Rs 50,000 crore to Rs 75,000 crore in market borrowings,” said Mataprasad Pandey, Vice President, Arete Capital Service.
India Ratings in a report said the Union government’s gross and net market borrowings are expected to decline to Rs 13.58 lakh crore and Rs 11.20 lakh crore, respectively, in the FY25 full Budget from Rs 14.13 lakh crore and Rs 11.75 lakh crore in the FY25 interim Budget.
As the fiscal deficit and the borrowing numbers appear achievable, Ind-Ra expects the FY25 full Budget to have a favourable impact on the interest rates, the report added.
Support from RBI’s dividend
In May, the central bank announced a higher-than-expected dividend, which led to speculation that the government may cut its borrowing from the market.
The Central Board of Directors of RBI had approved the transfer of Rs 2.11 lakh crore as surplus to the government for the financial year 2023-24.
The central bank said the surplus transfer was based on the Economic Capital Framework (ECF) adopted by the RBI on August 26, 2019, as per recommendations of the Bimal Jalan committee. The sharp jump in the surplus amount could be attributed to higher income from the forex holding of the central bank, among other factors.
According to Gaura Sen Gupta, Economist at IDFC First Bank, the RBI dividend provides additional fiscal space of 0.2 percent of GDP, after incorporating some moderation in tax revenues, muted disinvestment proceeds and expenditure at Interim Budget levels. How this additional fiscal space would be used is yet to be known.
On May 22, Moneycontrol reported that the highest-ever RBI dividend transfer is expected to ease the fiscal deficit by 0.2 percent to 0.4 percent in FY25.
In absolute terms, the fiscal deficit for 2024-25 is seen at Rs 16.85 lakh crore, with the number for 2023-24 lowered to Rs 17.35 lakh crore from the Budget estimate of Rs 17.87 lakh crore.
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Impact on bond yields
Experts say that bond yields are unlikely to react much after the Budget because market participants have already discounted borrowing numbers and inflows from bond inclusion.
“The current level of bond yield already takes into account the borrowing number for this year and therefore no change in borrowing should have limited impact,” Gupta from HDFC Bank said.
“Benchmark yield may trade at 6.95 percent, market seems to have factored in the most part of the rally,” Pandey said.
JPMorgan Chase & Co will add India securities to the JPMorgan Government Bond Index-Emerging Markets starting June 28, 2024.
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