The central government had provided options to the state governments to take loans in their name from open markets. The move was opposed by states and also public comments on the legality of the same were made by many office-bearers.
The Central Govt is backtracking from its own decisions and amendments to the GST compensation drafted for states during the 10th GST council meet held on 18th February 2017 (3/4) pic.twitter.com/MYsfTR0SmE
— TS Singh Deo (@TS_SinghDeo) October 13, 2020
The move was also seen as straining the relations between the centre and the opposition-ruled states.
The central government has modified the implementation of meeting the GST compensation shortfall. Now, the central government will take the loan under its name under the Option 1 and then hand it over to the states. The loan amount will be about Rs 1.1 lakh crore.
Before this decision, the non-agreement of states had led to an impasse and the issue kept dragging on. The update by the government should allow progress to be made.
Suyash Choudhary, Fixed Income, IDFC AMC believes that at the highest level of implementation there is not much change. The bonds segment of the financial markets reacts to government bond and state development loan (SDL) spreads. These remain unchanged in the new implementation, though the government’s borrowing calendar will now be revised so as to accommodate the 1.1 lakh crore Rupees.
Choudhary feels that there will be four impacts of the development.
The first is the financial strain will be spread over multiple years and is most likely to manifest as excess bond supply for the coming years.
The second is the even though this new amount will be raised, still, further borrowings cannot be ruled out. Choudhary reminds that this current extra is an adjustment and not accompaniment to any additional stimulus. The Chief Economic Advisor has also vocalized the same.
The third is the schedule made by RBI for the banks to unwind 2.5% of net demand and time liabilities (NDTL) additional held to maturity (HTM) limits for the SLR securities bought between September 1, 2020 and March 31, 2021. He feels that the schedule is aggressive and may make the banks reluctant to use the full dispensation provided but also be able to deploy only a small portion of incremental deposit accretion into HTM bought securities in the next year and a half as well.
The fourth is that because the equilibrium of the bond market is dependent a substantial intervention by RBI, and since the supply has gone up in 3 – 5 year, thus bonds of these tenure are expected to be favored more. Choudhary feels that thus the net additional supply, adjusted for RBI’s interventions, may be lesser than what the revised calendar may suggest.