Government’s attempt to push back pressure on debt repayment has limited success

The government’s attempt to delay debt repayments by buying back bonds or swapping them for longer-term securities has had limited success.

While buybacks have been halted due to strained government finances, the “debt shifts” haven’t seen many takers in a market with a large supply of bonds and a limited pool of buyers.

In a year in which government bond auctions have repeatedly failed partially, mounting buyback pressure is an additional concern, a finance ministry official said on condition of anonymity.

Over the past two months, the government intended to trade securities worth Rs 40,000 crore maturing within the next three years. Of that, he only managed to change Rs 10,393 crore, extending the tenure from 12 to 40 years.

  • In April, the government traded seven securities worth Rs 7,093 crore with a term of between one and three years and extended the term from 14 to 40 years.
  • In May, he only managed to trade two securities of Rs 3,300 crore maturing between one and three years in exchange for securities maturing in 12 years.
  • In 2020-2021, the government was able to trade securities worth Rs 1.18 lakh crore for the revised estimate of Rs 1.60 lakh crore. Generally speaking, the government has replaced securities with a maturity of less than three years with bonds with a maturity of up to 40 years.

The government has offered its floating rate bonds for “conversion auctions” in the hope of attracting better demand from bond market players, the finance ministry official quoted above said. But it only partially helped.

This is a concern as the government has not been able to budget for the buybacks this year and now the changes have run into difficulties, which will increase the pressure to buy back next year and increase gross borrowing, the said. responsible.

Debt buybacks, which have not taken place since 2017-18, are not expected to resume due to the tight fiscal situation. In years with a high budget deficit, there is no question of buying back government securities, the official said.

While exchanges are cash neutral, redemptions involve a cash payment.

According to data available on the RBI website, repayments on government securities due this year are estimated at Rs 1.59 lakh crore. This climbs sharply to Rs 4.34 lakh crore in FY 23 and then remains high in subsequent years.

This will only increase the need for gross financing in the years to come. During the current year, the government will borrow a gross amount of just over Rs 12 lakh crore, representing repayments worth Rs 2.81 lakh crore.

The challenge for the government is that the budget deficit is high enough, so the ability to redeem and trade securities has diminished as the market can only absorb a limited amount at the current level of yields, said Abhishek Upadhyay, Senior Economist at ICICI Securities Primary Dealership. .

According to Upadhyay, the government needs to plan ahead to deal with the heavy pressure from buyouts for next year.

Perhaps there will be more demand and participation for the conversion auctions towards the end of the year, when the economy improves and the RBI allows yields to rise, he said.

There is essentially a difference between what the markets want and what the RBI is offering, said Madan Sabnavis, chief economist at CARE Ratings. “This is a problem that we are having in the current fiscal year because the central bank is determined to ensure that yields do not increase because liquidity is provided to the system,” he said.

Sabnavis sees this problem continuing for at least three months until the economy remains fragile and the RBI’s position on yields remains unchanged.

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