Primary Dealers (PDs) and banks are understood to have requested the Reserve Bank of India (RBI) to spread the Government borrowing programme equally between the two halves of the upcoming financial year (FY23) in view of the huge borrowing plan and upward pressure on yields in the secondary debt market.

Further, the bond market players are believed to have sought continuation of the dispensation of enhanced limit for classifying Government securities (G-Sec) as “held to maturity” (HTM) in FY23 also so that lenders are encouraged to bid at the weekly G-Sec auctions.

The aforementioned requests come as PDs fear they may face devolvement pressure at the weekly auctions amid huge supply of G-Secs. Also, the appetite of banks, which are already having excess statutory liquidity ratio (SLR) investments, to buy more of these securities is seen flagging.

Moreover, there is also a possibility of bidders at G-Sec auctions demanding higher yields, in keeping with the secondary market yield movement, leading to RBI rejecting their bids and PDs having to absorb the unsubscribed auction amount either partially or fully.

PDs support the market borrowing programme of the Government. They have underwriting commitments at primary G-Sec auctions and get underwriting commission.

Huge borrowing programme

The Government’s budgeted gross market borrowing at ₹14.95-lakh crore for FY23 is higher that what the market had expected. RBI is expected to issue a calendar for issuance of G-Secs for H1 (April-September) of FY23 on March 31.

ICRA, in a report, noted that the yield on the 10-year benchmark G-Sec has risen by 38 basis points during calendar year 2022 so far, to 6.83 per cent on March 23,crossing the pre-pandemic levels.

A senior official with a primary dealership observed that it may be difficult for PDs to sell down the G-Secs that devolve on them at auctions in FY23 without incurring a loss as the secondary market G-Sec yields are pointing northwards.

For instance, if the 10-year G-Sec devolves on PDs at a yield of 6.90 per cent at an auction, a PD may be able to sell down this paper only at, say, 6.93 per cent in the secondary market, resulting in a loss of 21 paise. Bond yields and prices are inversely co-related and move in opposite directions. In the case of a 10-year G-Sec, one basis point yield movement translates roughly into a movement of about 7 paise.

Usually, 60 per cent of the Government borrowing programme is completed in the first half of a financial year and the balance 40 per cent in the second half. RBI makes room for others — states and corporates — to borrow in the second half. 

A senior bank treasury official said: “The revenue estimates for FY23 are very conservative. The Government will probably collect more tax than what they have estimated due to likely improvement in growth. So, after completing 50 per cent of the borrowing programme in the first half, if the tax collections are good, they may need to borrow only 40 per cent instead of 50 per cent in the second half. This could ease the pressure on yields.”

Persist with enhanced HTM limit

In September 2020, RBI had enhanced the total SLR securities that commercial banks could hold under HTM category from up to 19.5 per cent of their deposits to 22 per cent for SLR securities acquired on or after September 1, 2020 and up to March 31, 2021. Later, this dispensation was extended by a year.

Referring to the aforementioned dispensation, a mutual fund manager emphasised that given the huge Government borrowing programme in the upcoming financial year, it is necessary that it be extended further to enthuse banks to participate in the programme.

Once banks classify an investment as HTM, they need not make provision in case its value depreciates at the end of each quarter.

SLR securities include liquid assets held by Banks in the form of cash, gold or unencumbered investment in approved securities, including G-Secs and State Development Loans.

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