Indian Government to Borrow Rs 6.55 Lakh Crore; Green Bonds Included

Indian Government to Borrow Rs 6.55 Lakh Crore; Green Bonds Included

Issuing Government Securities to Fund Fiscal Deficit

The Indian government has announced a plan to borrow Rs 6.55 lakh crore through the issuance of government securities in the second half of the fiscal year 2023-24. The borrowing program includes the creation of Green Bonds worth Rs 20,000 crore, marking a significant step towards environmentally friendly financial solutions. The total gross borrowing for the financial year is projected to reach a record Rs 15.43 lakh crore, with a net borrowing of Rs 11.8 lakh crore.

Management of Borrowing and Fiscal Deficit

The Reserve Bank of India (RBI) will manage this borrowing process by issuing bonds through weekly auctions. The government is optimistic that it can manage its market borrowings without exceeding the budget. The fiscal deficit for 2023-24 is set at Rs 17.87 lakh crore or 5.9% of GDP, which will be financed through a combination of bond market borrowings, proceeds from small savings schemes, and the drawdown of the government’s cash balance.

Bond Auctions and Maturity Periods

Weekly government bond auctions will range from Rs 30,000 crore to Rs 39,000 crore between October 2023 and March 2024. Responding to the market demand for longer-duration securities, the government will issue a 50-year security for the first time. The breakdown of securities to be issued includes bonds maturing from 3 to 50 years.

Green Bonds and Redemption Profile

The Green Bonds will be issued in three maturities: Rs 5,000 crore each for 5 and 10 years, and Rs 10,000 crore for 30 years. This follows interest expressed by the Life Insurance Corporation of India and other domestic pension funds in longer maturity periods. The government also plans to continue switching securities to smooth the redemption profile, ensuring it does not have to pay too large a sum as the principal amount as its bonds mature in any given year. In addition to bonds, Treasury bills worth Rs 3.12 lakh crore will be issued in the third quarter of 2023-24.

Market Borrowing and Its Influence on Interest Rates

The government’s market borrowing substantially influences interest rates for the rest of the economy. With the expected easing of inflation and the decrease in the amount of bonds the government will sell in the second half of the year, economists predict a decline in bond yields. This expectation is further bolstered by anticipated key events, such as a reduction in the policy repo rate by the RBI’s Monetary Policy Committee and the inclusion of Indian government bonds in JPMorgan’s indices from June 2024.

Economists’ Predictions

Soumya Kanti Ghosh, State Bank of India’s group Chief Economic Adviser, predicts that the 10-year government bond yield could fall to 7% by the end of 2023-24 and breach 7% in the next fiscal year. Similarly, UBS strategists have lowered their 2024 forecast for the 10-year yield to 6.75% from 7%.