Bond investors, who have been raking it in for the last two months with falling yields, have something new to worry about — fiscal slippage as the likelihood of a bailout package for farmers increases ahead of elections even as goods and services tax (GST) collection is lower than the budget estimates.
The benchmark 10-year bond had eased to 7.22 per cent, the lowest since April 2018, in December mainly due to softening oil prices and helped by liquidity infused by the Reserve Bank of India’s (RBI) bond buybacks. However, announcements of farm loan waivers by the new Congress-led governments in Rajasthan, Madhya Pradesh and Chhattisgarh have put the focus on a likely similar announcement by the BJP-led government at the Centre before national elections later this year.
A loan waiver or direct benefit scheme by the government will increase expenses. This together with slow receipts from GST so far this fiscal have increased the chances of the government not adhering to its fiscal deficit target. Government bond yields are already reflecting this. The benchmark 10-year bond closed at 7.45 per cent on Friday, and has risen more than 20 basis points since December 19. One basis point is 0.01 percentage point.
“Yes, there is pressure on the fiscal, which is showing in bond yields,” said Naveen Singh, senior vice president at ICICI Securities Primary Dealership. “The only hope is that the government has too little time and data to implement a full farm loan waiver. But there are chances that they could start a pilot scheme or something. The risk is actually for the next year as borrowing could be higher because the government has not done any bond buybacks this year.”
Below par GST receipts are also likely to create pressure. GST collection slowed to Rs 94,726 crore in December, lower than the previous month’s Rs 97,637 crore and down from the more than Rs 1 lakh crore collected in October. The collections so far have been short of the Rs 1.10 lakh crore per month budgeted by the government in the current fiscal.
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“We should expect more and more announcements by the government as this is an election year,” said KP Baby, treasurer at Federal Bank. “Receipts have not caught up this year, as besides GST collections, the divestment target is also unlikely to be met. But the government will still do some financial engineering and keep the deficit number at 3.3 per cent as promised.”
Baby expects the 10-year bond yield to stay elevated and remain above 7.25 per cent, possibly touching 7.50 per cent in the next few weeks.
