A dumb bell strategy for govt borrowings could be abracadabra for market

Such a strategy could explore higher share of T-Bills in the borrowing spreadsheet across all three-time durations. RBI can mop up considerable additional amount under T-Bills route in all weekly auctions without disturbing the equilibrium, with a band of Rs 1500-2500 crore higher accretion set per week, as per market appetite and liquidity conditions in sight

Mumbai: The recent geo-political conflict has brought the focus back on government finances that might be derailed as the conflict intensifies. Against the possible impact on government finances, the markets are already apprehensive of a larger borrowing.

The government has been quick to clarify that it is unlikely to borrow in March. Beyond this, the RBI does have a host of unconventional measures to manage government borrowings in FY23 and it is important that debt market understands such nuanced undertows and does not get into frenzy as it is swirling currently with crude prices threatening to move beyond $120.

The roadmap for proposed borrowing would require leveraging all plausible alternatives within the framework through a 'dumb bell' strategy, says an internal economic research report by SBI.

First, such a strategy could explore higher share of T-Bills in the borrowing spreadsheet across all three-time durations. RBI can mop up considerable additional amount under T-Bills route in all weekly auctions without disturbing the equilibrium, with a band of Rs 1500-2500 crore higher accretion set per week, as per market appetite and liquidity conditions in sight.

Secondly, government may look to give a push to Small Saving Schemes. In particular, it can give a hard push to SSY (Sukanya Samriddhi Yojana), through encouraging fresh registrations in a mission drive mode, allowing one time registration for all left over 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 (16 per cent in number of SSY accounts though 30 per cent share in deposits).

Thirdly, the RBI can issue papers by matching the profile of redemption of Government paper. Ideally, papers up to 7 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. For short term segment, Banks, Mutual Funds (debt & hybrid), General Insurance Companies and Life Insurance Companies (ULIP & Hybrid) are the potential players. EPFO, Pension Fund, Other Provident Fund and Life Insurance Companies owing to their long liability profile are the players in the long-term segment. A demand for the mid segment has to be created to keep the pressure off the 10-year segment by doing OMO in the mid-segment. From the redemption profile of the Government till FY43, we estimate that FY29, FY30, FY37 & FY38 have more legroom to absorb redemption.

Fourthly, a quarterly borrowing calendar, in place of half yearly calendar on the lines of T-bill and SDL calendar will provide Government the flexibility to manage borrowing in line with evolving revenues and expenditures.

Fifthly, FRB outstanding constitutes 5.5 per cent of total G-Sec outstanding. Despite large outstanding, market liquidity in this segment is muted. To improve market liquidity and trading activity in this segment, RBI can earmark a portion of its OMO/OT programmes for FRBs.

Sixthly, 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 budgeted programme. Seventhly, auctions may be conducted twice a week instead of a single weekly auction at present.

Eighthly, switch auctions may be used proactively during first two quarters. This will help market participants take into account lower maturities during next financial year (FY24) and increase demand for securities during FY23.

Meanwhile, the prolonged conflict brings into forefront the familiar Triffin Paradox and subsequent Ben Bernanke argument of global savings glut. A jump in Brent prices while pushing down US yields is pushing up domestic yields. Because the US dollar is the reserve currency, the US even after running the highest current account deficit actually supplies large amount dollars to fulfil the world's demand, which in turn leads to increase in indebtedness of the US, but that is not reflected in a commensurate increase in US yields. With no backing of gold after the breakdown of Bretton Woods system, the US just prints dollars when it wants to expand liquidity (and go for QE), but ultimately when it withdraws liquidity the greatest impact is on Emerging Market Economies.

"We end with a positive abracadabra. Russia's bond offering that is aimed at foreign portfolio investors, called OFZ bonds had investments at around $40 billion from participating overseas entities. The turmoil post Ukraine invasion, along with sanctions imposed and country's rating downgrade can see investors readjusting their exposure, reallocating a greater percentage of assets earmarked for overseas destinations to India," says Soumya Kanti Ghosh, SBI group's chief economic advisor.

Separately, ne goes on, the holding in G-sec by LIC now have been around 19 per cent while they were in excess of 20 per cent during the years 2019, 2020. In contrast, the banking system ownership is around 38 per cent while other insurers together own close to 5 per cent of G-sec. The listing of LIC should augur well for the bond markets as the insurance behemoth may have to deploy more chunk of inflows to safer avenues domestically.