The recent geopolitical conflict has brought attention back to public finances which could be derailed as the conflict escalates. Faced with the possible impact on public finances, the markets are already fearful of higher borrowing.
The government was quick to clarify that it is unlikely to borrow in March. Beyond that, the RBI has a host of unconventional measures to manage government borrowing in FY23 and it is important that the debt market understands these nuanced pullbacks and does not enter a frenzy as it currently swirls with crude prices threatening to go beyond. $120.
The roadmap for the proposed borrowings would require taking advantage of all plausible alternatives within the framework through a “dumbbell” strategy.
First, such a strategy could explore a higher share of Treasuries in the borrowing spreadsheet across all three durations. RBI can mop a considerable additional amount under the treasury route in all weekly auctions without upsetting the balance, with a band of 1,500 to 2,500 crore higher set per week, depending on market appetite and liquidity conditions in sight.
Second, the government could seek to boost small savings schemes. In particular, it can give a hard boost to SSY (Sukanya Samriddhi Yojana), by encouraging new registrations in a mission conduct mode, allowing single registrations for all remaining cases up to 12 years. Using Business Correspondent (BC) channel partners by banks can be extremely useful as banks have a low share vis-à-vis post offices (~16% by number of SSY accounts but ~30% share in repositories).
Third, the RBI can issue papers matching the government’s paper buyback profile. Ideally, papers up to 7 years in the short-term segment, 10-15 years in the medium segment and beyond 15 years in the long-term segment could constitute the ideal mix to meet the borrowing appetite of market players. For the short-term segment, banks, mutual funds (debt and hybrid), general insurance companies and life insurance companies (ULIP and hybrid) are the potential players. EPFO, Pension Fund, Other Provident Funds and Life Insurance Companies, due to their long-term liability profile, are the players in the long-term segment.
Demand for the midsegment needs to be created to keep pressure on the 10-year segment by doing OMO in the midsegment. Based on the government’s refund profile through FY43, we believe that FY’29, FY30, FY37 and FY38 have more room to absorb the refund.
Fourth, a quarterly borrowing schedule, instead of a semi-annual schedule modeled on treasury bills and the SDL schedule, will provide the government with the flexibility to manage borrowing as revenues and expenditures change.
(Dr. Soumya Kanti Ghosh is Group Chief Economic Advisor, State Bank of India)
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Posted: Monday 07 March 2022, 09:29 IST