Informist, Wednesday, May 22, 2024
By Aaryan Khanna
NEW DELHI – At 2.11 trln rupees, the Reserve Bank of India's record surplus transfer to the government for 2023-24 (Apr-Mar) surpassed all expectations. This stoked hope among bond traders that the government would use the excess cash to cut its gross borrowing programme by up to 1 trln rupees in the current financial year.
The surplus transfer was much higher than the 1 trln rupees that most traders were expecting, while economists had pegged the dividend between 750 bln rupees and 1.2 trln rupees. Last year, the RBI had transferred 874.16 bln rupees to the government as its surplus. The Interim Budget for 2024-25 pegged the government's income from dividends of the RBI and state-owned banks at 1.02 trln rupees.
"The government has already cut its borrowing (through Treasury bills), and it doesn't look like they have avenues to spend in the first half, so a dated securities cut could also come," Naveen Singh, head of trading at ICICI Securities Primary Dealership, said. He pegged a potential gross borrowing cut of around 1 trln rupees.
After the announcement of the surplus transfer, the yield on the 10-year benchmark 7.10%, 2034 government bond fell 5 basis points to close at 6.99%, ending at its lowest level since Jun 7. It ended below the psychologically crucial 7% mark for the first time since Jun 13. Last week, the RBI said the government would cut its issuance through T-bills by 600 bln rupees in the rest of Apr-Jun. This is likely because it is sitting on a high cash balance.
"The market has already broken several crucial levels, and traders have already bought a lot. What will make a difference is if investors fear that a borrowing cut will happen, and they buy heavily at the auction (on Friday)," Singh said. The government will sell four bonds worth 290 bln rupees at the weekly gilt auction on Friday.
In the Interim Budget, the government said it would borrow 14.13 trln rupees through dated securities on a gross basis in 2024-25, down from 15.43 trln rupees in the previous year. This set the stage for a gross borrowing cut to be announced in the Union Budget, to be presented by the new government after the ongoing General Elections end on Jun 4, dealers said. Informist had exclusively reported on Tuesday, quoting a senior finance ministry official, that the government might increase the target for surplus transfer from the RBI and dividends from public sector banks and financial institutions.
Until the Union Budget in July, the 10-year benchmark yield could bottom out at 6.75% if expectations firm up on a substantial borrowing cut of dated securities, levels not seen since early 2022. The key level to break after the auction on Friday would be the 10-month low of 6.94%, dealers said. The upcoming inclusion of India's gilts in a JP Morgan index on Jun 28 will also likely keep foreign portfolio investment flowing into gilts. The 10-year yield will likely remain under 7% unless there's a change in government, which is an outside probability, or an abrupt rise in US Treasury yields. Even if there's no clarity on borrowing cuts, the government's stronger fiscal position is likely to cap the benchmark yield at 7.10%, dealers said.
Assuming all other budget numbers remain the same, the 2024-25 fiscal deficit can be reduced to 4.8% of GDP from 5.1% of GDP pegged in the Interim Budget, a back of the envelope calculation shows. Some economists expect an even sharper pace of fiscal consolidation, with State Bank of India expecting a 30-40 basis point cut.
"We expect such a windfall to help fiscal deficit to further ease by 0.4% in FY25 (2024-25). Scope for lower borrowing being announced in the upcoming Budget will now provide significant respite to the bond markets," Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, said.
The RBI's surplus transfer increased despite the rise in its contingency risk buffer to 6.50% from 6.00?rlier, which it increased as the Indian economy was robust and resilient, the central bank said. The RBI's interest income on both foreign and domestic securities likely increased in 2023-24 from the previous year, as yields hardened after central banks hiked interest rates and did not suggest any immediate cuts.
Economists also said that the RBI's gross dollar sales in 2023-24 would have added to the profit, though the income on this account was likely lower on year. The spike in the surplus could also have come from the write-back of provisions which the RBI would have made in earlier years, which got reversed because of the maturity of their treasury holdings, ICICI Securities Primary Dealership said. Regardless, under-recoveries from other segments may offset the impact of the additional non-tax revenue for the government.
"Incorporating potential shortfall in disinvestment receipts and more moderate tax collection growth than budgeted, FY25 (2024-25) fiscal deficit could undershoot Budget Estimate by 0.2% of GDP," Gaura Sen Gupta, economist at IDFC FIRST Bank, wrote in a note.
Speculation on gross borrowing cuts have been doing the rounds in the bond market since Wednesday. Media reports suggested the government would cut its borrowing in dated securities as an additional measure to inject liquidity in the banking system and reduce its pile of cash. Regardless, some bond traders remain sanguine on the prospect, and said the Union Budget presentation in July would likely be too soon for the government to gauge its revenues for the full year. The National Democratic Alliance-led government has also historically upped its spending when its revenues have increased, though it may find few avenues in a curtailed year if elected to power again, dealers said.
In the near-term, the government's spending pattern will be more closely monitored by the market after the Jun 4 outcome of the general election. With goods and services tax collections and the RBI surplus, the government's cash pile is speculated to have swollen to over 5 trln rupees. Drawing this down could require more substantial measures from the central bank. The next monetary policy review is scheduled on Jun 5-7.
"If the stance continues as 'withdrawal of accommodation' in the next policy, the RBI may use other tools, including OMO (open market operation) sales and foreign exchange interventions, to suck out the liquidity," V.R.C. Reddy, head of treasury at Karur Vysya Bank, said. End
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