Nirmal Bang writes in a note…
The government announced the borrowing programme for FY20 which suggests clear front loading of borrowing which is unlikely to bode well for yields. The government will borrow 62.3% of budgeted gross borrowing or Rs 4420 bn in H1FY20. This is significantly higher than Rs 2880 bn (47.6% of budgeted gross borrowing) in FY19, and also slightly higher than the historical average of 60%. With redemptions amounting to Rs 1018.7 bn, the net borrowing in H1FY20 amounts Rs 3401.2 bn, up from Rs 2004.3 bn in FY19, and at the highest level in the past seven years. With total budgeted gross borrowing of Rs 7100 bn, the gross borrowing in H2FY20 will be Rs 2680 bn. With redemptions of around Rs 1350 bn, net borrowing in H2FY20 will be Rs 1330 bn, a seven year low.
In their view, benign inflation and seasonally weaker credit demand in the first half of the financial year only partially justifies a heavy front loading of the government borrowing programme. Liquidity conditions are likely to remain tight given elections, while redemptions are back ended. With the front loading of government borrowing, all hopes of a rally in bond yields can be laid to rest, despite expectations of easing by the Reserve Bank of India or RBI. Meanwhile the fiscal deficit for April – February 2019 stood at 134.2% of revised estimates, compared to 120.3% a year ago. Divestment receipts witnessed a spurt in March, exceeding the target of Rs 800 bn, but tax revenues are falling short. In our view, only a cut in expenditure will allow the government to meet the fiscal deficit target of 3.4% of GDP. On a year to date basis, capital expenditure is down by around 8%, while revenue expenditure is up 12.5% YoY, but lower than the budgeted 13.9%.The current account deficit or CAD for Q3FY19 stood at US$16.9 bn or 2.5% of GDP, down from US$19.1 bn or 2.9% of GDP in the previous quarter. It was however slightly above our estimate of Us$15.1 bn or 2.3% of GDP. It was also higher than US$13.7 bn or 2.1% of GDP in Q3FY18. For the period April- December FY19, the CAD stood at 2.6% of GDP. Consequently, we have revised up our CAD estimate for FY19 marginally to 2.4% of GDP, from 2.3% earlier. The balance of payments recorded a deficit of US$4.3 bn in Q3FY19 primarily on account of portfolio outflows. Nevertheless, the sequential moderation in the CAD, and the recent return of FPI flows suggests a relatively benign outlook for the INR in the near term, although we continue to expect it to trade with a depreciation bias.