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● We believe the government and RBI’s commitment to control
inflation will be tested in the next two months.
● The Rs528 bn increase in FY12 government borrowing target
does not incorporate any change in the fiscal deficit target and
only reflects a miss on small savings. CS deficit estimates are
significantly higher than the government’s. Deficit in the first four
months was already 55% of FY12 targets, versus ~40% in normal
years (Fig 2), and ahead of even CS expectations.
● In the first five months, due to higher refunds, direct tax inflows
are only 18% of the FY target – it has been lower only in years
where the economy was accelerating (Fig 3). This has so far not
affected either bond yields or strained credit growth. However, this
is largely due to the strong 2H seasonality (Figure 4).
● Even using the government’s target borrowings and 17% deposit
growth, for credit growth to be more than 11% (9% on CS deficit
estimates), RBI would have to buy government bonds, i.e. ‘print
money’. This is likely to perpetuate the inflation problem (see our
note Inflation: closing one tap is not enough for details).
Figure 1: Increase in borrowing in spite of unchanged fiscal deficit target
Rs bn
Gross borrowing target in the Budget 4,170
Net borrowing target 3,428
Total redemption due in 2011-12 742
Gross borrowing in H1 (concluded) 2,500
Gross borrowing in H2 (revised on 29 Sep 11) 2,200
=> Expected gross borrowing in FY12 4,700
=> Expected net borrowing in FY12 3,958
=> Increased borrowing 528
Source: RBI, Bloomberg, Union Budget
The Government has released its 2HFY12 borrowing calendar,
increasing its FY12 borrowing target by Rs528 bn (Figure 1). This is
driven purely by funding changes (drop in collections through small
savings schemes), as the fiscal deficit targets remain unchanged.
CS estimates for FY12 fiscal deficit are substantially higher than the
government’s – fiscal deficit in the first four months of this year was
55% of the FY target, when normally it is in the 40% range (Figure 2).
Further, in the first 5 months, given higher refunds, the government
has so far collected 18% of the budgeted direct tax target (Figure 3).
This has so far not affected either bond yields or strained credit
growth (up 20% YoY YTD). But this is largely due to the strong 2H
seasonality (Figure 4): from 31-Mar to Aug-end deposits are up 5.4%,
while credit growth is 2.6% (seasonal 3.7%). Assuming 17% YoY
deposit growth for the banking system, and government’s revised
targets, we estimate the RBI may have to conduct open market
operations (OMO) to buy government bonds, i.e. print money again if
credit growth has to be anywhere higher than 11% in FY12 (Fig 5). If
CS borrowing numbers apply, the ‘no OMO’ credit growth rate would
be 9%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● We believe the government and RBI’s commitment to control
inflation will be tested in the next two months.
● The Rs528 bn increase in FY12 government borrowing target
does not incorporate any change in the fiscal deficit target and
only reflects a miss on small savings. CS deficit estimates are
significantly higher than the government’s. Deficit in the first four
months was already 55% of FY12 targets, versus ~40% in normal
years (Fig 2), and ahead of even CS expectations.
● In the first five months, due to higher refunds, direct tax inflows
are only 18% of the FY target – it has been lower only in years
where the economy was accelerating (Fig 3). This has so far not
affected either bond yields or strained credit growth. However, this
is largely due to the strong 2H seasonality (Figure 4).
● Even using the government’s target borrowings and 17% deposit
growth, for credit growth to be more than 11% (9% on CS deficit
estimates), RBI would have to buy government bonds, i.e. ‘print
money’. This is likely to perpetuate the inflation problem (see our
note Inflation: closing one tap is not enough for details).
Figure 1: Increase in borrowing in spite of unchanged fiscal deficit target
Rs bn
Gross borrowing target in the Budget 4,170
Net borrowing target 3,428
Total redemption due in 2011-12 742
Gross borrowing in H1 (concluded) 2,500
Gross borrowing in H2 (revised on 29 Sep 11) 2,200
=> Expected gross borrowing in FY12 4,700
=> Expected net borrowing in FY12 3,958
=> Increased borrowing 528
Source: RBI, Bloomberg, Union Budget
The Government has released its 2HFY12 borrowing calendar,
increasing its FY12 borrowing target by Rs528 bn (Figure 1). This is
driven purely by funding changes (drop in collections through small
savings schemes), as the fiscal deficit targets remain unchanged.
CS estimates for FY12 fiscal deficit are substantially higher than the
government’s – fiscal deficit in the first four months of this year was
55% of the FY target, when normally it is in the 40% range (Figure 2).
Further, in the first 5 months, given higher refunds, the government
has so far collected 18% of the budgeted direct tax target (Figure 3).
This has so far not affected either bond yields or strained credit
growth (up 20% YoY YTD). But this is largely due to the strong 2H
seasonality (Figure 4): from 31-Mar to Aug-end deposits are up 5.4%,
while credit growth is 2.6% (seasonal 3.7%). Assuming 17% YoY
deposit growth for the banking system, and government’s revised
targets, we estimate the RBI may have to conduct open market
operations (OMO) to buy government bonds, i.e. print money again if
credit growth has to be anywhere higher than 11% in FY12 (Fig 5). If
CS borrowing numbers apply, the ‘no OMO’ credit growth rate would
be 9%.
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