To assuage the market’s concerns on the impact of the Russia-Ukraine conflict on the government’s finances, State Bank of India’s economic research department (ERD) has proposed a roadmap for government borrowing including a higher share of Treasury Bills in the borrowing spreadsheet, giving a push to Small Saving Schemes, twice a week auctions, among others.

“The recent geopolitical conflict has brought the focus back on government finances that might be derailed as the conflict intensifies. Against the possible impact on the government finances, the markets are already apprehensive of larger borrowings. “...The roadmap for proposed borrowing would require leveraging all plausible alternatives within the framework through a ‘dumb bell’ strategy,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI, said in ERD’s report “Ecowrap”.

The ERD suggested that a higher share of T-Bills in the borrowing spreadsheet across all three time durations could be examined. The department noted that RBI can mop up a considerable additional amount under the T-Bills route in all weekly auctions without disturbing the equilibrium, with a band of ₹1,500-2,500 crore higher accretion set per week, as per market appetite and liquidity conditions insight.

Sukanya Samriddhi Yojana

Referring to the Small Saving Schemes, the ERD said in particular, the government could give a hard push to SSY (Sukanya Samriddhi Yojana), through encouraging fresh registrations in a mission drive mode, allowing one-time registrations for all leftover cases up to 12 years.

Roping in Business Correspondent (BC) channel partners by banks can be extremely useful since banks have a low share vis-à-vis post offices (about 16 per cent in a number of SSY accounts though about 30 per cent share in deposits), it added.

The ERD opined that RBI could issue papers by matching the profile of redemption of government papers. Ideally, papers up to seven years in the short term segment, 10-15 years in the mid-segment, and beyond 15 years in the long term segment could be the ideal mix of meeting the borrowing appetite of market players.

A quarterly borrowing calendar, in place of half-yearly calendar on the lines of T-bill and the State Development Loans (SDLs) calendar, will provide the government with the flexibility to manage borrowing in line with evolving revenues and expenditures.

“Instead of front-loading the government borrowings, RBI may, in consultation with GoI, spread its borrowing programme in 4 quarters and thereby keep the initial two quarters light or at least limited to 50 per cent of the budgeted programme,” as per the report Ecowrap.

Floating Rate Bonds

To improve market liquidity and trading activity in Floating Rate Bonds (FRBs), ERD proposed that the RBI can earmark a portion of its open market operation/operation twist programmes for FRBs.

FRBs outstanding constitutes 5.5 per cent of total government securities (G-Secs) outstanding. Despite large outstanding, market liquidity in this segment is muted. Ecowrap said auctions may be conducted twice a week instead of a single weekly auction at present.

“Switch auctions may be used proactively during the first two quarters. This will help market participants to take into account lower maturities during the next financial year (FY24) and increase demand for securities during FY23,” Ghosh said.

The turmoil post-Ukraine invasion, along with sanctions imposed on Russia and its rating downgrade can see investors re-adjusting their exposure to Russian bonds, reallocating a greater percentage of assets earmarked for overseas destinations to India, according to Ecowrap.

The report noted that Russia’s bond offering that is aimed at foreign portfolio investors, called OFZ bonds had investments at around $40 billion from participating overseas entities. ERD observed that the listing of LIC should augur well for the bond markets as the insurance behemoth may have to deploy more chunks of inflows to safer avenues domestically.