The recent geopolitical conflict has brought the focus back on government finances that might be derailed as the conflict intensifies. Against the possible impact on Government finances, the markets are already apprehensive of a larger borrowings.
The Government has been quick to clarify that it is unlikely to borrow in March. Beyond this, the RBI does have a host of unconventional measures to manage bovernment borrowings in FY'23 and it is important that debt market understands such nuanced undertows and does not get into a frenzy as it is swirling currently with crude prices threatening to move beyond $120.
The roadmap for proposed borrowing would require leveraging all plausible alternatives within the framework through a ‘dumbbell’ strategy.
First, such a strategy could explore higher share of T-Bills in the borrowing spreadsheet across all three time durations. RBI can mop up considerable additional amount under T-Bills route in all weekly auctions without disturbing the equilibrium, with a band of Rs 1,500-2,500 crore higher accretion set per week, as per market appetite and liquidity conditions in sight.
Secondly, the government may look to give a push to Small Saving Schemes. In particular, it can give a hard push to SSY (Sukanya Samriddhi Yojana), through encouraging fresh registrations in a mission drive mode, allowing one time registrations for all left over cases up to 12 years. Roping in Business Correspondent (BC) channel partners by banks can be extremely useful since banks have a low share vis-à-vis Post offices (~16% in number of SSY accounts though ~30% share in deposits).
Thirdly, the RBI can issue papers by matching the profile of redemption of Government paper. Ideally, papers up to 7 years in the short-term segment, 10-15 years in the mid segment and beyond 15 years in the long term segment could be the ideal mix of meeting the borrowing appetite of market players. For short term segment, Banks, Mutual Funds (debt & hybrid), General Insurance Companies and Life Insurance Companies (ULIP & Hybrid) are the potential players. EPFO, Pension Fund, Other Provident Fund and Life Insurance Companies owing to their long liability profile are the players in the long term segment.
A demand for the mid segment has to be created to keep the pressure off the 10-year segment by doing OMO in the mid-segment. From the redemption profile of the Government till FY43, we estimate that FY'29, FY30, FY37 & FY38 have more legroom to absorb redemption.
Fourth, a quarterly borrowing calendar, in place of half yearly calendar on the lines of T-bill and SDL calendar will provide Government the flexibility to manage borrowing in line with evolving revenues and expenditures.
(Dr. Soumya Kanti Ghosh is Group Chief Economic Adviser, State Bank of India)
