New Delhi: The government on Friday evening steeply revised up its 2020-21 borrowing programme by 53.85% to Rs 12 lakh crore, from Rs 7.8 lakh crore estimated earlier, indicating that the Centre is giving shape to an imminent and sizeable fiscal package to arrest the COVID-19 related slowdown.“The above revision in borrowings has been necessitated on account of the COVID-19 pandemic,” the Reserve Bank of India (RBI) said in a statement on its website.Between May 11 and September 30, the government will be borrowing Rs 6 trillion from the market. The original plan, as announced on March 31, was that in the first half (between April and September), the borrowing would be Rs 4.88 trillion, of which the government has already borrowed Rs 98,000 crore from the markets.“This indicates that stimulus measures are probably around the corner. The government has got resources from fuel excise, and now additional borrowing,” said Badrish Kulhalli, head of fixed income at HDFC Life Insurance.Senior government sources confirmed to Business Standard that the RBI has been given a relatively free hand to keep the yield curve in check through expanded open-market operations in secondary markets.“The RBI will have to participate in OMOs in some way and keep the yield curve from jumping up. There will clearly be a pressure on yields and the RBI will have to manage it. It will involve expanded OMOs,” said an official involved in the discussions on the increased borrowing.When asked if the increased target also means that the RBI will now monetize the deficit by directly purchasing bonds from the government, the official said: “The RBI has so far not keen on private placements.”Officials confirmed that the discussions between Finance Ministry and the central bank on increasing the borrowing target took place in the past 7-8 days, after the new economic affairs secretary Tarun Bajaj took charge. There were extensive deliberations on whether to announce the increase now or along with the borrowing calendar for October-January, in September.A second official admitted that the increased borrowing means the 2020-21 fiscal deficit target of 3.5% of GDP no longer holds, since borrowing is one of the means to finance the deficit.A quick calculation shows that provided all other parameters remain the same, the fiscal deficit will expand to around 5.3% of GDP for this year. However, the other assumptions made in the budget, like a 10% nominal GDP growth, will clearly not be realised due to the COVID-19 pandemic. “The fiscal deficit will expand, but we can’t put a number since the situation is quite dynamic,” the second official said.The revised calendar showed that every month there would be Rs 1.2 trillion of borrowing. Clearly, this is way above the market appetite. All kind of dated securities maturing in two years and above will be used, including floating rate bonds.The bond yields had nosedived on Friday as the government introduced a new 10-year bond with a cut-off coupon of 5.79%. The old benchmark 10-year bond yield also dipped below 6% for the first time since February 2009. The benchmark 10-year bonds had closed at 5.97%, from its previous close of 6.05%.Before the surprise borrowing calendar was announced, the bond market was bullish expecting further rate cuts and not a very large package, according to Harihar Krishnamurthy, head of treasury at First Rand Bank. But the calendar indicates a sizeable package could be coming pretty soon.Clearly, the government aims to borrow cheap, but the yields will shoot up for certain, unless the RBI comes up with deep rate cuts, or declares heavy secondary market bond purchases say, experts. With the borrowing calendar in place, chances of private placement with the RBI is more or less nixed.“We need considerable support from RBI, else RBI’s rate cuts will become redundant. Amid credit crisis, borrowers would face more challenges, while investors would be more focused on intertemporal choices,” said Soumyajit Niyogi, associate director at India Ratings and Research.According to Soumya Kanti Ghosh, chief economic advisor of State Bank of India (SBI), the central bank must now conduct reverse repo and term reverse repo operations without any collateral. Such non-availability of securities in liquidity operations will boost the demand for government securities, and if Standing Deposit Facility (SDF) is introduced, which is a facility under which the RBI would absorb liquidity at a lower rate than reverse repo and without any collateral, the entire interest rate structure can be pulled down.“In particular, lower operative overnight rate, short term rate and lower supply and generation of additional demand will bring down the yield of long-dated Government bonds also, thereby pulling down the sovereign yield curve. This will also reduce the interest cost of RBI,” Ghosh said.By arrangement with Business Standard.