Question : Who lends money to Indian government ?

Indian government’s total expenditure normally remains much higher than the total revenue receipts. The difference, known as fiscal deficit, is the amount of capital government needs to borrow to bridge this gap.

After eight years of moderation, the fiscal deficit saw a significant bump in FY20 and is expected to increase significantly in the current year due to Covid. The deficit projections for the current fiscal have ranged between 6.75% to 7.25% of GDP – levels last observed three decades back.

A large chunk of this borrowing will be met by issuing bonds. Reserve Bank of India, in May, had already steeply revised the FY-21 borrowing programme by more than 50%. In light, of this, its interesting to analyse who all have traditionally been the investors in government bonds in the past and how has the ownership pattern changed over the past few years.

Ownership pattern as on March 2020
As depicted in below chart, as on March 2020 – commercial banks were the largest investors as they held almost forty percent (almost twenty-six lakh crores in rupee terms) of outstanding Government of India dated securities. Second largest investors were insurance companies who owned twenty five percent of these securities. Third largest investor was Reserve Bank of India itself as it held more than fifteen percent of these securities. Foreign portfolio investors, interesting, held less than 2.5% of the Government of India Bonds.

Below chart depicts the ownership pattern of Government of India dated Securities as on March 2020

Trends over the past few years
Decrease in share of bank holding: Share of commercial banks has come down over the decade by ten percent. This seems to be primarily driven by reduction in Statutory Liquidity Ratio which has also reduced to 18%(as on date) from 25% (as on March 2007).

RBI’s holding has trebled since 2008: RBI considerably expanded its purchase in government bonds post the Global Financial Crisis and subsequently in FY 12-13. This has resulted in RBI’s share becoming thrice – more than 15% as compared to less than 5% share in March 2008. Its widely expected that RBI’s share will increase substantially this year as it will need to step in to finance government’s expanded borrowing programme.

Other Salient Points:

  • Insurance companies have consistently remained the second largest investors in government bonds with share largely stable and in range of 18-27% over the past decade.
  • In T-Bills, again banks have been the biggest investors with a share consistently above 50%. Mutual funds have also had on average ~10% share in this market compared to less than two percent share in long term bonds.
  • Foreign Portfolio Investors have pulled back from the market – their share has significantly reduced from the peak 4.5% figure of Sep,2017.
  • Lastly, time and again, demand has been made by various market participants that government of India should diversify its lender base by issuing foreign currency bonds. We had covered the benefits and drawbacks of such an issuance in our earlier article – the same can be accessed at India’s Foreign Currency Debt: To Do Or Not To Do, That Is The Question !

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