The central government had provided options to the stategovernments to take loans in their name from open markets. The move was opposedby states and also public comments on the legality of the same were made bymany office-bearers.
The move was also seen as straining the relations betweenthe centre and the opposition-ruled states.
The central government has modified the implementation ofmeeting the GST compensation shortfall. Now, the central government will takethe loan under its name under the Option 1 and then hand it over to the states.The loan amount will be about Rs 1.1 lakh crore.
Before this decision, the non-agreement of states had led toan impasse and the issue kept dragging on. The update by the government should allowprogress to be made.
Suyash Choudhary, Fixed Income, IDFC AMC believes that atthe highest level of implementation there is not much change. The bonds segmentof the financial markets reacts to government bond and state development loan (SDL)spreads. These remain unchanged in the new implementation, though the government’sborrowing calendar will now be revised so as to accommodate the 1.1 lakh croreRupees.
Choudhary feels that there will be four impacts of thedevelopment.
The first is the financial strain will be spread overmultiple years and is most likely to manifest as excess bond supply for thecoming years.
The second is the even though this new amount will beraised, still, further borrowings cannot be ruled out. Choudhary reminds thatthis current extra is an adjustment and not accompaniment to any additionalstimulus. The Chief Economic Advisor has also vocalized the same.
The third is the schedule made by RBI for the banks tounwind 2.5% of net demand and time liabilities (NDTL) additional held tomaturity (HTM) limits for the SLR securities bought between September 1, 2020and March 31, 2021. He feels that the schedule is aggressive and may make thebanks reluctant to use the full dispensation provided but also be able todeploy only a small portion of incremental deposit accretion into HTM boughtsecurities in the next year and a half as well.
The fourth is that because the equilibrium of the bondmarket is dependent a substantial intervention by RBI, and since the supply hasgone up in 3 – 5 year, thus bonds of these tenure are expected to be favoredmore. Choudhary feels that thus the net additional supply, adjusted for RBI’sinterventions, may be lesser than what the revised calendar may suggest.