Reduced system liquidity, lack of additional held-to-maturity (HTM) space among banks, and lower demand from the insurance sector could pose challenges to the smooth conduct of the borrowing programme in FY24, cautioned the State Bank of India’s Economic Research Department (ERD) in its special report on the Union Budget.
“Taking the demand from different participants into consideration, there could still be a gap of ₹2.8 lakh crore between the demand and supply of securities.
“This could be filled by RBI through OMOs (open market operations) or switches in the 2nd half to balance supply-demand dynamics, especially if small savings collection does not pick up pace,” the report stated.
Since the insurance sector and pension funds are the key players for long-term securities of 15 years and above, the ERD team believes the RBI can make some special arrangement with the insurance sector or pension funds for long-term bonds and go in for exclusive placement in long-tenor bonds with these investors.
For FY24, gross market borrowing through dated securities has been budgeted at ₹15.43 lakh crore (₹14.2 lakh crore for FY23); and with repayments of ₹3.62 lakh crore (adjusted for recovery of ₹78,104 crore from GST compensation fund), net market borrowing stands at ₹11.8 lakh crore (₹11.08 lakh crore).
The Government has also announced switch of ₹1.0 lakh crore in FY24 as against the revised ₹1.03 lakh crore in the current fiscal.
“Notably, the Government stocks repurchased by means of switch will not have any impact on the fiscal situation. The short-term borrowing for FY24 has been pegged at ₹50,000 crore, that we expect might be scaled up, if need arises,” the report said.
State borrowings
The ERD noted that when it comes to state government borowings (via state development loans or SDLs) for FY24, with the ceiling net borrowing at 3.5 per cent of GDP, the net borrowings are pegged at ₹5.4 lakh crore and gross borrowings are expected to be around ₹8.2 lakh crore after a repayment of around ₹2.9 lakh crore.
The net borrowing of states could go up to₹5.8-6 lakh crore if the states increase their capital expenditure, it added.
Thus, total gross borrowing of the Centre and States for FY24 comes to ₹23.6 lakh crore while net borrowing stands at ₹17.2 lakh crore.
“Based on the ownership pattern of Government of India dated securities as on September 2022, and given the total net borrowings at ₹17.6 lakh crore (G-sec, SDL and Treasury Bill issuances), we believe demand of securities from banks to be in line with the incremental supply (around ₹5.2 lakh crore) to ensure LCR compliance and also benefit from reasonably high carry,” the report said.
The insurance sector could subscribe to ₹3.9 lakh crore. Good demand is also expected from other participants, given the expected growth in assets under management, it added.