Budget Expectations: Government likely to set a higher target for issuance of government bonds

19 Jan 2023 , 03:18 PM

Both central and state governments are expected to increase their bond issuances in FY 24. Governments raise debt money by selling their bonds. These bonds are called Government Securities in India. According to credit rating agency, ICRA, bond issuance of central government is likely to increase year-on-year by 5.5% to Rs 14.8 trillion in FY 24.

In the year before general elections, the central government is more likely to increase its expenditure. The government will do this to give a boost to the economy.  So actual issuance of bonds may turn out to be even higher than projections. 

Increased borrowing by governments through issuance of bonds raises interest rates in general. So it becomes more expensive for the private sector too to raise money through borrowings. Government borrowing in domestic currency is assumed to be mostly risk free. This is because the government in the worst case scenario can get more currency printed to pay off its debt obligations. The bonds issued by corporate sector is never risk free. There is always some probability that the private company or entity can default on its debt. The private entity does not have the privilege to print currency when needed. So credit risk of private bonds is always higher than that of government bonds. Therefore, the interest rate demanded on private bonds is almost always higher than that on government bonds. So if the interest rate on the government bond goes up because of increased borrowing by the central government, that on private bonds will also go up.

 Increase in interest rates by RBI coupled with the increase caused by increase in government borrowing may prove to be a double whammy for the private sector in the year.