FM’s big task in the Budget, to deal with beginning of season of very high debt redemption

Finance Minister Nirmala Sitharaman has big challenge in her hand and that is how to cope with very large redemption beginning - Fiscal Year 2022-23). G Sec (Government Securities) alone is expected to see more than 55 per cent rise in redemption.

Experts have divergent views on higher redemption. While DK Srivastava, (Principal Policy Advisor of EY) feels this could push the interest rate, Anil K Sood (Co-Founder & Professor, IASCC) feels cost of borrowing may go up in worst case situation only. A report prepared by State Bank of India sees more switching i.e., replacing shorter tenure security with longer term security and thus putting off redemption.

According to the Quarterly Debt Report, prepared by Economic Affairs Department of Finance Ministry, G Sec worth ₹ 4.21-lakh crore is due to mature in FY23 and this will further increase to over ₹4.40-lakh crore in FY24. Now, one positive factor goes in favour of the government is the higher cash balance. Expectation is that this could be as high as ₹3-lakh crore which will help in lowering the need for borrowing.

New redemption

Meanwhile, Srivastava said that Centre’s gross borrowing is higher than its net borrowing by the amount of redemption of outstanding debt. The profile of new redemption during 2022-23 to 2027-28 shows a sudden and large jump. In fact, debt redemption during these six years is more than four times the average debt redemption during the preceding three years from 2019-20 to 2021-22. This implies that in order to raise a given amount of net borrowing which amounts to Centre’s fiscal deficit in a given year, the government will have to access the market for a much larger amount of gross borrowing.

“This is bound to put pressure on the interest rates,” he said.

Further he mentioned that in 2022-23, interest rate would also come under pressure as the US and other developed countries move towards a higher interest rate regime in order to contain their inordinately high inflation rates. Inflation in India is also currently under pressure due to high global crude prices, process of primary products, and supply side bottlenecks. This may also call for raising the policy rate in India. The cost of borrowing for the State governments may also go up. “It is important to recast India’s fiscal consolidation targets taking these developments into account. Further, as domestic interest rates in India go up and government’s demand on available resources for borrowing increase, private investment may be crowded out,” he said.

According to Sood, given that inflation is expected to be at the higher end of the target, he expects the yields to firm up across the board. “If RBI lets the market determine the rates, there should be no problem on refinancing the government debt or raising fresh debt. Yield curve at the end of Sep 2021 is lower than June 2021 in some maturity buckets. That would need to change. Else, RBI will end up buying and holding the government securities at rates that it sees as fair. The government will still be able to raise the required resources,” he said.

Further he advised that RBI must not take its role of “managing yield curve as a public good” too seriously. It must let the market price debt keeping in mind the expected inflation and demand for debt.

“In the worst-case situation, the cost of borrowing may go up. Given that we are still recovering from the pandemic related economic losses, a marginal increase in interest cost would not hurt the economy, as long as the new borrowings are invested in productive assets. Fiscal deficit is not a concern at this stage, in any case,” he said.

Table

Maturity in Fiscal Year 2022-23

Amount in Rs Cr

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