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RBI WATCH

Time to rethink borrowing cap on individual gilts

 

By Bhaskar Dutta

NEW DELHI – There is no formal limit on the amount the Indian government can borrow through a single dated security. In practice, the Centre has always adhered to an unofficial limit on the outstanding amount that it racks up on individual papers, in order to avoid lumpy repayments.

Around 10 years ago, this limit used to be 600 bln rupees, which gradually increased to around 900 bln rupees by 2016-17 (Apr-Mar). It was in 2017-18 that the government allowed itself to borrow up to 1.2 trln rupees through a single paper, and has adhered to this limit ever since.

The Increase In The Single Security Borrowing Limit Over The Last 10 Years Has Been 100%, But It Hasn't Really Kept Pace With The Government's Borrowing Requirement, Or The Size Of The Economy.

The limit itself has increased over the years, keeping in mind the size of the government's borrowing programme, the size of its balance sheet and in turn its cash management ability. Because of these considerations, it is now time for the Centre to raise the ceiling further.

The increase in the single security borrowing limit over the last 10 years has been 100%, but it hasn't really kept pace with the government's borrowing requirement, or the size of the economy.

India's GDP in 2019-20 stood at 20.44 trln rupees, a 159% rise over the GDP back in 2010-11. The Centre's gross borrowing this year, at 12 trln rupees, is 168% higher than what it was a decade ago.

One must also to take into account the bond switches worth 2.7 trln rupees projected for this year, as these bring in supply of on-the-run papers. Including these, the gross amount of bonds sold by the Centre has gone up by 22%.

The fallout of the disparity has been that the space for re-issuing bonds is being filled up very quickly, requiring the government to issue new papers more frequently. This stands in the way of consolidating the number of outstanding securities, a long-standing debt management goal of the government and the Reserve Bank of India.

In fact, it has long been proposed to switch illiquid papers with on-the-run securities to concentrate liquidity at different points of the yield curve. The Centre can pull this off only if it shrugs off its misgivings about the amount it borrows through a single bond.     

Moreover, frequent issuances of new bonds is disruptive for the bond market. Case in point is the 10-year benchmark 5.79%, 2030 bond that had to be recently retired within three months of its issuance. At this rate, by the end of the borrowing programme of 2020-21, the 10-year benchmark will have changed thrice.

Ideally, this transition should be made just once a year, as the 10-year benchmark is the pricing reference for the yield curve as well as a gamut of credit products. With each new 10-year issuance comes a realignment of the yield curve at two stages - at first when the incumbent benchmark adds on an illiquidity premium, and later when the new and aggressively priced paper takes over.

Another reason for the government to hike the borrowing cap is the goal of listing Indian bonds in global indices. Taking a step in this direction, the RBI recently permitted full investment by foreign portfolio investors in certain government bonds. The step was taken to increase the market liquidity of these bonds, a requisite for international listing.

The current limit implies that even if one were to exclude all other categories of investors, FPIs would only be able to hold 1.2 trln rupees, roughly $150 bln, at any given time. Moreover, the listed securities will turn illiquid once their re-issuances cease.

What makes the government's reticence even more befuddling is the fact that over the years, many new tools of debt management, such as buybacks and switches have been developed in order to ensure that repayment obligations do not bunch up at any one time.

Hopefully, the government and the RBI realise that the burgeoning borrowing requirements of the day need to be backed by adroit management of debt.

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POLICY RATES

============

Repo Rate: 4.00%

Reverse Repo Rate: 3.35%

Cash Reserve Ratio: 3.00%

Bank Rate: 4.25%

Marginal Standing Facility Rate: 4.25%

Statutory Liquidity Ratio: 18.00%

End

Edited by Avishek Dutta

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