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Authored article in The Economic Times

Issuance of another 10-Year Benchmark Paper – its Historical Perspective

The fiscal slippages (the excess of expenditure over income) have been rampant since the global financial crisis of 2008-09. This led to heavy borrowing by the Central Government through bond issuances. The actual borrowing rose from Rs. 1.88 lakh crore in FY-08 to Rs. 4.51 lakh crore in FY-10. In FY-12, the government revised the total borrowing to Rs. 4.7 lakh crore; thus, increasing the total borrowing by Rs. 52,872 against the earlier estimate of Rs. 4.17 lakh crore. The RBI achieves this herculean task of unprecedented borrowing through different bond issuances. In India, most of the policy followers, economists and analysts widely follow 10-Year Government Security as the benchmark for the interest rate movement. So, the government announces the 10-Year Benchmark Paper every year.

In H2FY12, the fiscal slippages due to poor tax collections, failed disinvestment targets (due to bleak market scenario), small savings mobilization and higher tax refunds have forced the government to go for additional borrowing which will lead to continuous bond supplies in the range of Rs. 13k-15k crore every week. This has put a lot of pressure on bond yields including on 10-Year Benchmark paper, 7.80% GS 2021. The 10-Year Benchmark paper yield rose unidirectional to touch as high as 8.99 per cent in this fiscal and there is a speculation that it may touch its high of 9.25 per cent achieved during the financial crisis of 2008-09.  Unless the RBI comes out with OMO and does not exceed its revised borrowing limit, the bond yields will remain under pressure.

Historical Issuances of 10-Year Paper

It is common tendency that the RBI maintains a borrowing limit of Rs. 65k crore to Rs. 70k crore per security. So, it makes a judicious mix of securities so as to fulfill its borrowing plan so that the average maturity of securities and the average yield remain reasonable. The increased borrowing in recent years has forced RBI to auction new papers including 10-Year Benchmark Paper every year. The table 1 shows the historical 10-Year Benchmark Papers.

The table shows that there have been instances when two 10-Year Benchmark Papers have been issued so as to fulfill its borrowing limit. In FY-03 and FY-09, there were two 10-Year papers issued i.e. 6.85% GS 2012 & 7.40% GS 2012 in 2002-03 and 6.05% GS 2019 & 6.90% GS 2019 in 2009-10 respectively. In FY-12 too, an additional 10-Year Benchmark paper (8.79% GS 2021) has been auctioned including the earlier auctioned paper, 7.80% GS 2021.

Need of new 10-Year Benchmark

The table 2 gives the current outstanding of G-Secs. We see that the outgoing 10-Year Benchmark Paper 7.80% GS 2021 has a total outstanding of Rs. 68,000 crore. Other actively traded and auctioned securities have reached its historical limit of Rs. 65k crore to Rs. 70k crore.

In H2FY2012, the government has to borrow Rs. 2.2 lakh crore through a judicious mix of different securities. Since the 10-Year Benchmark Paper broadly defines the market sentiment, the government aims to keep it actively traded and liquid. However, as the current outstanding limit has reached to Rs. 68,000 crore in the existing paper 7.80% GS 2021, the need for the new 10-Year Benchmark Paper has arisen. The new paper 8.79% GS 2021 would easily absorb the supply for the remaining auctions and can accommodate up to Rs. 65-70k crore. In near future, the market may also witness few other new securities as existing securities like 8.13% GS 2022, 8.26% GS 2027 and 8.07% GS 2017 have already reached its historical outstanding limit (beyond Rs. 69,000 crore). The performance of the new 10-Year Benchmark Paper would depend largely upon the various macroeconomic factors including inflation, fiscal slippages, additional borrowing and OMOs, if any.

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