Each basis point rise in bond yield costs government Rs 416 crore: Report

MUMBAI: India's public debt of Rs 49,60,472.3 crore is 43.7 per cent of GDP, of which only 8.3 per cent consists of external liabilities, but each basis point rise in the interest rate on bonds has cost the nation a whopping Rs 416 crore per annum, said a report today.

As of September 2014, an overwhelming 91.7 per cent of the total debt was internal and only 8.3 per cent external, which together constituted 43.7 per cent of GDP, said the report by India Ratings.

Public debt is Government borrowings from the market to bridge fiscal deficit (gap between expenditure & revenue).

In 2013-14, the Government had spent Rs 3,80,066 crore in interest servicing, which was 36.9 per cent of its total revenue receipts.

"But the rising interest rates have seen that on the outstanding internal debt, each basis point movement in yield has cost the exchequer Rs 416 crore per annum," it said.

The 10-year bonds traded at 7.69-7.72 per cent today. Noting that the Government decision to finance public debt primarily through domestic savings is a big positive for the economy, the rating outfit said elongating the maturity profile of the dated securities issued from FY11 was not the right strategy, especially given the rising interest rates.

The Centre's debt stood at 64.7 per cent of GDP in 2013-14, or 1.62 times the 'BBB' rated peer group's median of 40 per cent, when the country's debt/revenue was 3.1 times against peers' median of 1.5 times. This makes us highly vulnerable to growth cycles and an outlier among the 'BBB' category economies, the report said.

In fact, the government had extended the maturity of debt instruments at the turn of new millennium too as fiscal deficit was high and RBI pursuing an accommodative monetary policy in view of low GDP growth and low WPI inflation.

As a result, the weighted average yield on the new issuance declined to 5.71 per cent in 2003-04 from 10.95 per cent in 2000-01 and the weighted average maturity period peaked to 16.9 years in 2005-06.

As the RBI reversed the course of the monetary policy from August 2005 onwards, the weighted average maturity period of the new issuance was brought down to 11.16 years in FY10.

However, the report noted that in lieu of shortening the tenor of new debt in view of rising interest cost, the government elongated their maturity from FY11 despite rising borrowing cost and a low rollover risks as only around 6 per cent of the outstanding debt was needed to be rolled over every year during this period.

Meanwhile, the Government today said pace of growth of public debt marginally dipped to 2.1 per cent in the December quarter on a sequential basis from 2.3 per cent in the second quarter of the fiscal.