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Fiscal deficit to undershoot, may spur cancellation of final two G-sec auctions: ICRA

08:39 AM Mar 06, 2021 | Agencies

The yield for the 5.85 per cent government security (GS) 2030 has risen by more than 35 basis points since its introduction to 6.23 per cent intra-day as on Friday with an uptick in recent weeks led by higher-than-expected fiscal deficit, ratings agency ICRA said.

The yield has also gone up due to borrowings for FY21 and FY22, a rise in US Treasury yields and hardening crude oil prices.

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"In our assessment, there could be a modest upside to government's tax revenues while its non-interest non-subsidy revenue expenditure may trail the revised estimate for FY21." Thus fiscal deficit in FY21 may end up undershooting the revised estimates of Rs 18.5 lakh crore by Rs 0.5 lakh crore to Rs 0.9 lakh crore, said ICRA.

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Accordingly, we project the fiscal deficit in FY21 at Rs 17.6 lakh crore to Rs 18 lakh crore or 9 to 9.2 per cent of GDP, lower than the 9.5 per cent of GDP included in FY2021 revised estimates.

Based on this, ICRA assessed a lower borrowing requirement of the government in the remainder of this fiscal year.

"However, given the substantial development in today's auction, it remains unclear whether the government will choose to cancel the last two weekly auctions of government security (G-sec) with a planned amount of Rs 49,000 crore instead of carrying forward larger cash balances." If the final two G-sec auctions for March do end up being cancelled, ICRA expects the yield for the benchmark 5.85 GS 2030 may temporarily soften from the current levels to 6.1 to 6.15 per cent in the remainder of this month.

"In our view, the benchmark yield may rise during Q1 FY22 to as much as 6.35 per cent by the end of the quarter," it said.

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