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Informist, Thursday, Jan. 9, 2025

MUMBAI/NEW DELHI – The central government is unlikely to reduce its gross borrowing of INR 14 trillion in 2024-25 (Apr-Mar), even though it may undershoot its fiscal deficit target of 4.9% of GDP in the current financial year, IDFC FIRST Bank said in a research report. The report says the government may instead lean towards a cut in its short-term borrowing in the form of lower Treasury bill issuances.

"Despite the fiscal undershoot, G-sec supply is not expected to be cut," said Gaura Sen Gupta, chief economist of IDFC FIRST Bank, in the report. "Given the strong demand for G-secs (government securities), the Centre has preferred to cut T-bill supply instead in the past." The economist's estimate shows the government will not make up rejected bids worth INR 103 billion for sovereign green bonds, from the budgeted INR 14.01 trillion figure.

The report said insurance companies, provident funds and pension funds have picked up long-term bonds which match their liabilities, while foreign portfolio investment flows have also supported the market. Foreign portfolio investors bought fully accessible route gilts worth INR 769.17 billion in FY25 so far, Clearing Corp. of India data showed. These bonds, which have no limits for foreign investment, have been included in the emerging market bond indices of J.P. Morgan, Bloomberg and FTSE Russell. Owing to these demand positives and a repo rate cut in February, IDFC FIRST Bank forecasts the 10-year benchmark gilt yield at 6.5-6.6% by March end, against 6.77% at 1600 IST Thursday.

The Jan-Mar T-bill calendar implied a negative net competitive issuance of INR 915 billion for FY25, the report said. State governments may drive up the non-competitive issuance, which could provide space to cut T-bill issuances in the March quarter, the report said. Sen Gupta estimated the total FY25 net T-bill issuances to be (-) INR 1 trillion against the government's budgeted estimate of an INR 500 billion negative issuance.

The government is likely to run down its cash balance to INR 1.3 trillion by March from a peak of INR 5.1 trillion in May, with further buybacks in FY25, the report said. In addition to the INR 686 billion worth of FY26 gilts bought back already, Sen Gupta expects another INR 500 billion of buybacks. 

The Centre's fiscal deficit as a percentage of GDP is likely to shrink to 4.7% against the budgeted 4.9%, as capital expenditure is likely to miss the budgeted amount of INR 11.11 trillion by around INR 1.5 trillion, the report said. In absolute terms, the fiscal deficit may be lower by INR 830 billion from the INR 16.133 trillion budget estimate, according to IDFC FIRST Bank's forecasts.

Some of the miss on the capex front will be made up by higher revenue expenditure, the report said. Meanwhile, total receipts are also likely to miss the budgeted mark by INR 500 billion despite the Reserve Bank of India's record dividend transfer of INR 2.1 trillion, over double the budgeted amount. Direct taxes and goods and services tax receipts for the government are seen as a miss, while disinvestment receipts are set to undershoot the target by INR 250 billion. Among direct taxes, surging personal income tax collections may offset the slowdown in corporate tax receipts, the report said.   End

Reported by Cassandra Carvalho and Aaryan Khanna

Edited by Deepshikha Bhardwaj

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