G-SEC,DEBT,RATING-THEY WAY OUT FOR INDIA

India will need a debt management strategist very soon. They will need these specialist ones at the government level and the other one at the corporate level to strike a balance between asset and liability. The Indian G-sec market will be under pressure as yield might go up based on the debt to GDP and the falling numbers of revenue and the extensive borrowing which is required.  RBI will require Rs 22lakhs of raising debt for the government and for the state government too at the lowest cost. Inflation is currently down and the interest rates which might change once the inflation goes up. But as consumption is less the inflation devil will not chase you for the time being.

Debt to GDP of India stands at around 70% whereas household savings stands at 7%. This is expected to go up to 80%+.  This is the grey area where the pressure on global ratings will kill. Further ratings on NBFC and Banks add as topping making the country sovereign rating under significant risk. The fiasco of the Mutual Fund Industry has also amplified the matter.  On the other hand, the total borrowing of the State and Centre is around 15% of the GDP

Govt revenues are down and will remain down for Fy-21.  If we look at the expenditure side of the government we find that in FY-21 1^st month of April we find that 20% rise in expenditure to Rs.3.07lakhs compared to Rs 2.54 lakhs cr in FY-19. The reason being front-loading of rural and essential sectors like education, health etc. This year the govt focus will be on rural India mainly as migrant labours are all going to stay in rural and fewer chances of coming back. Hence we will not be surprised to witness an increase in allocation to NREAGS from the current levels of Rs 1.01 lakhs cr. Well earlier in Budget of FY-21 it was cut down from the previous FY-19 by 13.5% to Rs.61500 cr. Now in the month of May 2020 an additional Rs 40000 cr made it to RS 1.01lakh cr which will be required to be enhanced in this year and also in FY-22.  Expenditure management is now a critical component for the Indian government. Revenues have already gone for a toss and any further cut down in GST rates or taxes on essential things will create more loses. They can’t even increase as it will spook inflation and also unbearable for the people in this situation.

The pandemic threat and risk of life raises the bar of spillover to Fy-22. Health will need more funding and also the rural economy.  Coming to the expenditure front centre expenditure stands at 4lakhs cr whereas state stands at Rs.5lakhs cr.  These expenditures will now be prioritised and war will begin between the state and centre. In simple terms, the government does not have enough space to borrow and increase its fiscal deficit. Already it is anticipated that deficit including state will be hopping 10% +.

Now you need a debt management mechanism. You will need to bring masala bonds and bonds designed for NRI to invest.   These bonds will help to manage the borrowings. Banks are keener to park money here as they have no borrowers and only refinancing which they want to avoid at the outmost. RBI will hike the Held to maturity segment for the banks so as banks can absorb more of these g-sec offerings.  Banks will also get relief as they will eligible for SLR and also will not attract Mark to market.

Banks are all focussed to play safe. They don’t want to get behind the bars. They are looking for AAA paper in NCD or PSU papers etc. Banks deposits will grow as people don’t want to part in Debt schemes post the fiasco of Franklin. Hence the liquidity management will be done through the HTM route. This has a high probability.

Commercial papers and other instruments were funded by the MF, Pension and Insurance segment. But the sword on the head regarding ratings will make them less attractive and their battle begins. As lending is drying up corporates will stay away from paying back and this will be a huge roll.

The immediate question is that this borrowing deployment is a critical aspect. If Gross Fixed Asset Formation does not happen then there is a serious problem for the economy. How the borrowing and how it is met will decide the fate of G-sec yields.