MUMBAI: India’s central bank head said on Friday that the market’s focus on the size of the federal government’s gross borrowing for the next financial year could be misleading and that net borrowing provides a more accurate assessment of the fiscal position.
Indian bonds sold off at the start of the week after the federal budget on February 1, as the size of the borrowing plan failed to assuage long-running worries over the gap between demand and supply for debt.
“Looking at gross borrowing is not the correct way because there are much more redemptions next year than the current year,” said Reserve Bank of India Governor Sanjay Malhotra at a press conference following the central bank’s monetary policy announcement on Friday.
Malhotra pointed out that net borrowing is set to increase by only 200 billion rupees ($2.2 billion) in the coming financial year, and in percentage terms its growth will be much less than the expected pace of growth in India’s nominal GDP.
India’s forex reserves rise to record high of $723.77bn
India aims to gross borrow a record 17.20 trillion rupees through sale of bonds in the next financial year, up from 14.61 trillion rupees this year.
Net borrowing however is budgeted to rise to 11.73 trillion rupees from 11.53 trillion rupees this year. India’s fiscal year runs from April through March.
Malhotra also said there will be net issuance of treasury bills next financial year and the government’s budgeted numbers for small savings are “conservative”.
Both factors may ease the pressure on bonds, which have been trading near their weakest levels in over a year. Benchmark 10-year government bond yields were up 7 bps to 6.72% as of 2:40 p.m.
The governor, meanwhile, ruled out making any more changes to its liquidity management framework and said the RBI would continue targeting for the overnight rate to be close to the policy repo rate.
“We aim to keep WACR (weighted average call rate) towards repo rate and hope that this will be transmitted to all the markets,” Malhotra said, adding that it is the duty of RBI to provide ample and sufficient liquidity as required to meet the productive needs of the economy.
Luring foreign investment into bonds
Earlier in the day RBI removed a limit of 2.5 trillion rupees for investments in debt securities under the voluntary retention route (VRR).
India devised the VRR route to attract long-term, stable foreign debt flows by exempting such investments from certain restrictions in return for a lock-in commitment.
Foreign investors have to remain committed for at least three years under the VRR route.
Investment through the VRR in each category of securities will be subject to the same investment ceilings as the general route, Malhotra said.
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