Enhancing the transparency of debt management operations, the Budget Division of the Department of Economic Affairs, Ministry of Finance, GoI has been publishing a quarterly report called “Public Debt Management – Quarterly Report” from the first quarter of FY-2010-11. This is a step towards the establishment of Debt Management Office (DMO) in the Government which has been advocated for quite some time.
The current one is the fifth quarterly report and pertains to the first quarter of the fiscal year 2011-12, viz., Apr-Jun, 2011. The report gives an account of the debt management and cash management operation during the quarter, and attempts a rationale for major activities. The previous other reports are as given below:
The main highlights of latest quarterly report of ‘Public Debt Management’:
Section 1: Macroeconomic Developments
1) The headline inflation (as measured by WPI) remained high, above 9 per cent consistently in last 8 months with the major contributors from non-food articles, fuel & power group, edible oil and cotton textile.
2) GDP slowed down from 9.4 per cent in Q4FY10 to 7.8 per cent in Q4FY11. There has been a constant downfall in GDP in each quarters of FY 11.
3) IIP remained subdued in comparison to last year performance; however, the IIP growth showed improvement in June 2011 to 8.8 per cent from 5.9 per cent in May 2011.
4) Exports and Foreign investments remained robust. While India’s exports during Q1FY12 registered a growth of 45.7 per cent, inflows due to foreign investment increased more than four times. The portfolio investment, considered as the dicey asset to minimize the Current Account Deficit (CAD) remained moderate in the said quarter.
Section 2: Debt Management – Primary Market Operations
1) The GoI expects to maintain the fiscal deficit for 2011-12 at 4.6 per cent of GDP or at Rs. 4,12,817 crore. However, the figures look unlikely achievable because of lower revenue collection both from tax and non-tax revenues.
2) During Q1FY12, the total long dated securities issued were Rs. 1,20,000 crore or 28.8 per cent of BE. Considering account repayments of Rs. 13,473 crore, the net amount raised through dated securities stands at Rs. 1,06,527 crore. There was a total devolvement of Rs. 1,506.5 crore.
3) Two new securities of 7-years and 10-years maturities were issued. Majority of the raising had been done on re-issues which reflects the continued focus on building up adequate volumes under existing securities imparting greater liquidity in the secondary market. G-Secs woth Rs. 54,000 crore and Rs. 36,000 crore were borrowed under the maturity bracket 5-9 years and 10-14 years respectively; while remaining were raised under longer dated tenures.
4) The weighted average maturity of dated securities issued during Q1FY12 increased to 12.1 years than 10.45 years in Q1FY11. However, the average maturity of outstanding securities as at end-June 2011 declined to 9.58 years from 9.64 years. Also, the weighted average yield increased to 8.36 per cent in Q1FY12 from 7.62 per cent in Q1FY11. The continuous policy rate hikes by RBI put upward pressure on G-Secs which effectively increased the average cost of borrowing. It crossed the average borrowing yield above 8 per cent after FY08 when it borrowed at an average rate of 8.12 per cent. In FY 2003-04, the average yield was as low as 5.71per cent which started increasing since then.
Section 3 – Cash Management
1) The Reserve Bank manages the government’s cash account; any mis-matches in cash flows are largely managed through issuances of Cash Management Bills, Treasury Bills and access to Ways and Mean Advances (used in deficit) or through buybacks of G-Secs held by RBI (used in surplus mode). The WMA borrowing happens at repo plus 2 per cent and the current limit stands at Rs. 30,000 crore for Q2FY12 and Rs. 10,000 crore between Q3FY12 to Q4FY12.
2) The cash position remained in deficit mode in Q1FY12 except the first week of April. Henceforth, it remained in deficit mode to the tune of Rs. 50,000 on an average.
3) The government also issued Cash Management Bills (CMBs) worth Rs. 38,000 crore as an alternative to WMA where borrowing happens at higher relative cost. Against a total maturity of Rs. 20,000, the net CMBs issued remained at Rs. 18,000 crore. The cut-off yield increased gradually as the borrowing limit increased.
Section 4 – Trends in Outstanding Public Debt
1) The total public debt of the government increased to Rs. 31,49,996 crore at end-June 2011 from Rs. 29,75,628 crore at end-March 2011. The internal debt constituted 90.3 per cent of public debt; among the internal debt, the share of marketable securities accounted for 78 per cent. Overall 30.9 per cent of outstanding stock has a residual maturity of upto 5 years, which implies that over the next five years, one an average, 6.2 per cent of outstanding stock needs to be rolled over every year. Thus, the rollover risk in the debt portfolio remained low.
2) Banks remained the major holders of G-Secs; the trend continued at 50.4 per cent. Insurance companies on an average hold 22.22 per cent.
Section 5 – Secondary Market
1) The inflationary concerns, policy rate hikes and fuel price increases including imported inflation in the form of higher commodity prices were certain factors which raised the 10-year G-Sec yield from 8.01 per cent on end-Mar 2011to 8.33 per cent on end-June 2011. The bond yield curve remained largely flat with the inversion happing at 5 years maturity bracket compared to 10 year yield.
2) The maturity distribution pattern of dated securities remained largely in 7-10 years bracket (46 per cent) in Q1FY12 compared to 6.9 per cent in Q4FY11. The shift in share of trading volumes shorted to 7-10 years bracket due to launch of new 10-year benchmark paper. However, the above 10 years category declined from 72.5 per cent in Q4FY11 to 41 per cent in Q1 FY12. It was mainly due to increased volume in two papers 8.08% G-Sec 2022 and 8.13% G-Sec 2022 which were traded actively in absence of an active 10-year paper.
Happy Investing! Happy Reading!
- Amar Ranu
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