Fiscal deficit will keep supply of G-Secs high, says RBI ED

The gross supply of bonds (government securities) will remain elevated even after fiscal consolidation as the Centre is likely to continue running fiscal deficits in the foreseeable future, according to G Padmanabhan, Executive Director, Reserve Bank of India.

What this means is that to bridge the fiscal deficit (the gap between total revenue and expenditure), the Centre will resort to increased borrowings by issuing government securities.

He attributed the deficits to the accumulated debt stock that needs to be rolled over as also to the country’s growing gross domestic product.

“The government is committed to the fiscal correction path and fiscal consolidation, but challenges abound for the bond traders and markets.

“The demand for bonds would be impacted by, among other factors, the likely pick-up in the private sector credit, scaling down of statutory liquidity ratio (SLR) and held-to-maturity (HTM), the policy stance on foreign portfolio investment in government securities (G-sec), etc.,” said Padmanabhan at the Annual Meet of the Primary Dealers Association of India.

SLR is the slice of deposits that banks have to necessarily invest in G-Secs. Currently, it stadns at 22 per cent of deposits.

HTM is an investment classification for banks. Securities acquired by banks with the intention to hold them till maturity, are classified under the HTM category.

With regard to foreign investment in domestic financial markets, the RBI’s policy has been to increase access in a calibrated and gradual manner, Padmanabhan said. Though the central bank is sensitive to the demand for opening markets to foreign investors, the advantages of widening and diversifying the investor base which improves demand for government bonds need to be kept in view along with the considerations about financial stability arising from sudden stop and reversal risks.

“These risks manifested during the taper tantrum. Our markets were liquid enough to enable large transactions in an orderly fashion and this is one of the factors that inspired confidence among global investors and influenced their return,” Padmanabhan said.

However, he observed that the financial stability implication of ‘investment tourists’ exiting at a whiff of trouble has always to be kept in mind as India progresses along the path of liberalisation.