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Government’s Shift from Short-Term to Long-Term Borrowing
Context :
The Government of India has reduced its net short-term borrowing by ₹1.2 lakh crore, decreasing the supply of treasury bills (T-bills) and short-term instruments while shifting towards increased borrowing through long-term securities, especially bonds with maturities over 10 years.
Impact of the Reduction in Short-Term Borrowing
- Decline in T-bill and Short-Term Instrument Supply
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- The redemption of T-bills increased from (-) ₹50,000 crore to (-) ₹1.2 lakh crore, leading to a fall in their supply.
- The government has chosen to rely on longer-term securities instead of frequent short-term borrowings.
- Increase in Long-Term Securities (10+ Years Maturity)
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- The government has shifted focus to long-term bonds, aligning with investor preferences.
- The recent introduction of 50-year bonds caters to long-term investors such as insurance companies and pension funds.
Reasons for the Shift
- Institutional Investor Demand for Long-Term Bonds
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- Insurance companies and pension funds require long-term investment instruments to match their long-term liabilities.
- These investors prefer 20+ year maturity bonds due to their stability and predictable returns.
- Growth in the Insurance Sector
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- The insurance industry recorded a 7.7% growth in FY 2023-24, with total premiums reaching ₹11.2 lakh crore.
- Life insurance premiums accounted for ₹8.3 lakh crore, while non-life insurance premiums stood at ₹2.9 lakh crore.
- The sector continues to attract high foreign investment, with insurance receiving 62% of total equity FDI inflows into the services sector.
Rationale Behind the Shift
- Enhancing Macroeconomic Stability
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- Long-term bonds reduce the frequency of debt rollovers, ensuring fiscal stability.
- This strategy minimises interest rate volatility risks associated with short-term borrowing.
- Fiscal Consolidation Strategy
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- The government’s gross market borrowing is pegged at ₹14.82 lakh crore for FY 2025-26.
- Net market borrowing is ₹11.54 lakh crore, slightly lower than ₹11.63 lakh crore in FY 2024-25.
- Infrastructure Financing Alignment
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- Long-term bonds provide stable funding for capital-intensive infrastructure projects.
- The shift supports government initiatives like the National Infrastructure Pipeline (NIP) and Gati Shakti.
Implications of the Shift
- Impact on Bond Yields and Interest Rates
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- Increased issuance of long-term bonds could raise long-term bond yields, influencing borrowing costs.
- However, consistent demand from institutional investors can stabilise yields and prevent excessive volatility.
- Strengthening Financial Market Depth
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- Expansion of long-term government bonds improves financial stability and deepens the bond market.
- Benchmark long-term bonds provide pricing references for corporate debt, encouraging corporate bond issuance.
- Increased Attractiveness for Global Investors
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- The issuance of longer-term securities aligns with the needs of foreign institutional investors (FIIs) seeking stable returns.
Challenges and Considerations
- Exposure to Interest Rate Risks
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- Long-term bonds are more sensitive to interest rate fluctuations, impacting returns for investors.
- The government needs prudent debt management to mitigate potential risks.
- Liquidity Constraints
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- A shift to long-term bonds could reduce market liquidity, affecting fiscal maneuverability.
- Short-term instruments provide flexibility in responding to immediate financial needs.
- Risk of Concentrated Investor Base
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- A reliance on insurers and pension funds limits investor diversification.
- Any sudden change in their demand patterns could impact bond market stability.
Government Market Borrowing
- Short-Term Borrowing Instruments
- Treasury Bills (T-bills): Issued for 91 days, 182 days, and 364 days.
- T-bill supply has declined due to a shift towards long-term bonds.
- Long-Term Borrowing Instruments
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- Government Bonds (G-secs): Maturity periods of 5 years, 10 years, 20 years, 30 years, and recently introduced 50 years.
- 50-year bonds cater to the rising demand from institutional investors.
What are T-Bills and Government Borrowing Instruments?
- Treasury Bills (T-bills)
- Short-term debt instruments issued by the government.
- Maturity periods of 91, 182, and 364 days.
- Used for meeting short-term liquidity needs.
- Government Securities (G-Secs)
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- Long-term debt instruments with maturity periods ranging from 5 years to 50 years.
- Used for long-term capital financing.
- Bonds with Special Features
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- Inflation-Indexed Bonds (IIBs): Protect against inflation.
- Green Bonds: Used for funding environment-friendly projects.
