At a time when the government is shifting debt management function away from the central bank, the latter today said high government borrowing programme is acting as a constraint for the creation of a deeper corporate bond market.
“The huge supply of government paper in the country is one of the major impediments to the growth of corporate bond market,” R Gandhi, deputy governor, Reserve Bank of India said, while addressing a corporate debt event organised by Care Ratings.
The union budget has proposed creation of a Public Debt Management Agency, which will manage government’s borrowing – a function which is performed by RBI now. The reason behind shifting debt market from RBI is that there is a conflict of interest, that is, if RBI manages government borrowing and in case inflation is high then the central bank will prefer higher bond yields which in turn will increase government’s cost of borrowing.
However, central bankers are of the view that one of the pre-conditions for debt management function to be shifted from RBI was lowering government borrowing programme. But that has not been the case and government’s market borrowing remained elevated over the years.
Presenting data which showed the inability of the corporate debt market to grow, Gandhi said every year, the government borrowing only grows “unabated”.
The government will borrow Rs 6 lakh crore from the market in 2015-16 fiscal, up from Rs 5.92 lakh crore in the current fiscal.
“If we compare with government bond market, the corporate bond market is dwarfed,” he said, adding that as a percentage of GDP, the outstanding government bonds were at 49.1% while corporate bonds were at 5.4%, in 2013.
However, the deputy governor welcomed the fiscal consolidation plan of the government as a step in right direction which will aid the deepening of the corporate debt market. The union budget deferred the fiscal consolidation roadmap by one year and said will reach the 3% fiscal deficit by 2018.
“We have seen that the government is progressively trying to reign in the deficit at absolute level which will put less pressure on the market,” he said.
Gandhi also said the RBI’s move to gradually reduce the Statutory Liquidity Ratio (SLR), or the amount of government bond holdings for banks, will also be beneficial to the corporate debt market.
With the banking system plagued with rising NPAs (non-performing assets), shifting to the corporate bond market for funds is very desirable, Gandhi said.
Gandhi said there is a need to reassess the role played by institutional investors in the corporate debt market.
He further added, corporates should focus on coming out with more public issues of debt rather than having private placements as is the practice currently. Gandhi said the role of institutional investors such as pension funds, provident funds and insurance companies must be reassessed.
“They do need to take some initiative and be aggressive in actively managing their portfolios. Their investment horizons should not be confined to AA and above instruments only,” he said.
On the foreign portfolio flows, Gandhi said that they were being reviewed from time to time.
“Consistently we have been monitoring the level of flows that are coming in this segment. And the limits that we have kept are based on such assessment. If there should be full utilisation of limit, then we will have to review the situation vis-a-vis the country’s total external debt position,” he said.