Union government plans to borrow Rs 2.88 trillion in FY 2018-19.
What is union government’s plan on borrowing?
Union government has planned to borrow Rs 2.88, against market expectation of Rs 3.3-3.6 trillion.
To meet its fiscal demands government usually borrows from the bond market and by using other instruments.
The normal practice of borrowing from the bond market will be around 60-65 per cent.
For now first half of borrowing government has planned 47.5% of budgeted amount for 2018-19.
The weekly borrowing size would also be Rs 120 billion, against the usual Rs 150-180 billion.
The Union will also reduce its planned buyback of government securities (G-Secs) by Rs 250 billion.
How this borrowing has been planned?
The government plans to draw an additional Rs 250 billion from the National Small Savings Fund (NSSF) to finance the fiscal deficit for 2018-19.
For this RBI, on behalf of the government, will be issuing bonds in 1-4 year maturity, raising Rs 240 billion through the papers.
Inflation-indexed bonds linked to the consumer price index (CPI), and floating rate bonds will be used to raise 10 per cent of the first-half borrowing.
The borrowing will also be done through instruments that have been in demand in the market, instead of a maturity profile in the shape of 10-14 years.
The government also said it would introduce new benchmarks in the 2-year and 5-year categories.
What are the benefits of this move?
Government’s move had been welcomed by bond market player as it will ease pressure on the market considerably by reducing the first-half borrowing.
The borrowing plan will allow the government to meet all its expenditure requirements without getting into an overdraft situation.
CPI-linked bonds will have much better chance of success compared to WPI linkers.
The borrowing profile will help banks and other investors invest in bonds again.
This will also ease the redemption pressure on the government at the cost of duration risk on the bank credits.
Introduction of benchmarks allows government to raise money through bonds and liquidity and allows to create many other derivatives.
