The Indian government unexpectedly lowered its gross borrowing target for next financial year, as it expects to repay a chunk of maturing debt through the Goods and Services Tax (GST) compensation fund, budget documents showed on Thursday.
The government aims to reduce its fiscal deficit to 5.1% of gross domestic product (GDP) and borrow a gross of 14.13 trillion rupees ($170.36 billion) in the fiscal year starting April 1.
Economists, however, had expected borrowings to slightly increase to 15.6 trillion rupees in fiscal 2025, according to a Reuters poll, from fiscal 2024's target of 15.43 trillion rupees.
Net borrowings are pegged at 11.75 trillion rupees for fiscal 2025, largely unchanged from 11.80 trillion rupees for the current financial year that ends on March 31.
Government bonds worth 3.61 trillion rupees are due to mature in fiscal 2025, according to Reserve Bank of India data.
The difference between the budgeted gross and net borrowing targets is 2.38 trillion rupees, leaving 1.23 trillion rupees of bonds to be repaid via alternate funds, traders said.
Budget documents showed the government expects to get 1.23 trillion rupees from the GST compensation fund in 2024-25 which will be used to fund some of the upcoming bond redemption.
When the government introduced GST in 2017, it promised to pay compensation to states in lieu of taxes subsumed by the new indirect tax system until July 2022, which was extended to March 2026, to repay the loans taken during the COVID-19 period.
The government will also switch 1 trillion rupees worth of bonds coming due in the next few years with longer-tenor securities, budget documents showed.
Bond yields plunged after the announcement, with the 10-year benchmark bond yield , dropping to 7.0370%, its lowest in more than seven months.
The borrowing targets are much lower than expected and this makes the demand-supply dynamics even better, said Sonal Varma, managing director, chief economist - India and Asia ex-Japan at Nomura. ($1 = 82.9400 Indian rupees)
