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Wednesday, Aug 11, 2004

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Ministry not worried over interest outgo

Richa Mishra
Harish Damodaran

New Delhi , Aug. 10

THE Finance Ministry does not see its interest payments outgo during the current fiscal to go way beyond the Budget estimate of Rs 129,500 crore. This is despite the coupon rates on its recent market loans going up significantly in line with rising inflation levels.

In the auction of its 11-year floating rate bonds, 2015 (FRB) on Monday, the Centre managed to raise Rs 6,000 crore at 5.12 per cent annual interest (comprising a base yield of 4.62 per cent and cut-off spread of 0.50 per cent). But even mobilising this involved devolvement to the tune of Rs 587.29 crore, of which Rs 370 crore was on primary dealers (PD) and the rest on the Reserve Bank of India.

Compare this to its earlier 11-year FRB floatation on July 1, which fetched Rs 6,000 crore at just 4.71 per cent (base yield of 4.52 per cent and cut-off spread of 0.19 per cent). And even prior to this, on May 6, the Centre offered a 12-year FRB 2016 for a similar amount at an even lower rate of 4.49 per cent (base yield of 4.45 per cent and cut-off spread of 0.04 per cent).

Simply put, the Centre's average cost of borrowings has gone up by over 60 basis points in the past three months, even after discounting for the devolvement in the latest auction. Finance Ministry officials admit that the rise in interest costs have not been factored in the Budget estimate. They, however, maintain that there would be no huge over-run.

Since 2000-01, the Centre's actual interest payments have consistently ruled below the Budget estimates. The reason: the massive dip in the weighted average cost of market loans raised during the year from 11.84 per cent in 1998-99 to 5.74 per cent last fiscal, alongside a near-doubling of average maturities to 14.94 years.

But there is a feeling that things may be quite the opposite in the current fiscal, with the revised estimate on interest payments turning out higher than the budgeted Rs 129,500 crore.

"The firming up of rates is a recent phenomenon. Even assuming that we continue to borrow at higher rates from now, the impact on interest payments for 2004-05 will not be much. This is because coupon payments happen only every six months and the interest outgo on loans raised in the next half will show up only in the coming fiscal," North Block officials said.

The officials also claimed that the Centre's gross market borrowings in 2004-05 are likely to be below the budgeted Rs 124,818 crore, which, too, will help restrain interest payments. So far, during the current fiscal, the Centre has made gross market borrowings of Rs 44,000 crore (excluding Rs 20,000 crore mopped up from securities issued under the Market Stabilisation Scheme).

This is against the Rs 74,000 crore that was raised during this time last year. Net borrowings have also so far been lower, at Rs 18,224 crore, against the corresponding Rs 61,532 crore during 2003-04.

Rising interest costs are also being reflected in the borrowings of State Governments. On April 21, the first instalment of the 10-year State Development Loans (SDL) for Rs 6,500 crore was raised at 5.6 per cent. The second one for Rs 8,471 crore, on May 26, was made at 5.7 per cent. The latest SDL on July 29 was offered at 6.35 per cent, despite being for a lower nine-year tenor. And even after all this, the States raised only Rs 6,288 crore, against the targeted Rs 8,500 crore.

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