An influx of government bonds could shake up market dynamics
So far in October, states’ government bond issuance is 24% ahead of schedule, with states on track to issue. obligations worth almost ₹1 lakh crore more in FY24 than the previous year on a gross basis.
The unexpected increase in supply adds upward pressure on sovereign bond yields, which determine the cost of borrowing for companies. The decline in cash balances, the cessation of GST The removal of offsets and costly alternative financing have all played a role in the rise in government bond issuance.
“The state government’s cash surplus as on October 20, calculated as holdings of 14-day treasury bills and auctions, stands at ₹2 lakh crore, which is lower than the September-end figure of ₹2.4 lakh crore and lower than the same period last year. at ₹2.4 lakh crore,” said Gaura Sengupta, economist, IDFC First Bank.
Sengupta estimates gross borrowings in the states market at ₹8.5 lakh crore in FY24, compared to ₹7.6 lakh crore in the previous year.
According to the indicative market borrowing schedule for October-December, released by the RBI on September 27, state governments were to have issued bonds worth ₹74,842 crore in the previous month. States ended up selling bonds worth ₹92,639.03 crore in October.
“There is certainly a mismatch between state revenues and expenditures. It is likely that some states will bring forward certain types of expenditures before the national elections as well as the general elections and will want to accelerate certain things,” said Madan Sabnavis, an economist in chief, Bank of Baroda. “There might also be some delays in terms of payments for some of the state-sponsored programs that states might promote, essentially social welfare programs,” he added. The most glaring discrepancy occurred during the last auction on October 31, when states raised funds. worth ₹25,255.51 crore while bond sales worth ₹15,600 crore are planned in the RBI timetable.
Even though the fiscal deficit of states is expected to be contained within the 3.5 per cent ceiling prescribed by the Centre, Sabnavis said states may resort more to market borrowing to finance the deficit, as borrowing from small Savings funds have become more expensive.
Ordinarily, the increase in state borrowing would not have dented the bond market as states generally increase their issuances in the second half of the fiscal while the Center reduces borrowing.
However, at the current juncture, the reprieve in the Centre’s bond offering could be offset by the RBI’s plans to sell bonds in the open market, as the central bank seeks to drain the banking system of excess liquidity . The yield on the benchmark 10-year government bond jumped 16 basis points to a seven-month high of 7.38% since the RBI mentioned plans for OMO sales in its policy statement from October 6.
