We have been hearing about diversification as a key factor in case of investing. Diversification can be done through various ways like asset class wise, duration wise etc. Similarly, it is equally important in case of borrowing which we can understand with various examples.
Diversification in Investment tries to protect downside risk in any of the asset class and Diversification in terms of borrowing (borrowing for different tenors & through different mediums) helps to reduce average cost of borrowing.
RBI (Debt Manager of Central Government) has made use of this very effectively, Being the banker of the Government, it is important to manage market borrowings and sovereign debts of the country.
Between 30th Sept’22-30th Sept’23, we saw the rate hike of 60bps. Now please look at the weighted average coupon of the outstanding debt of the central government for the same period; it went up by 18bps only. It is possible only due to diversification in borrowing in terms of maturity profile.
Govt needs money in a staggered/ phased manner hence RBI factor in that information and borrow accordingly!
Yield is a public good but not coupon, actual cost of borrowing of government will only increase if the coupon will be on higher side. Coupons on existing securities won’t change but coupon on fresh borrowing will change due to repo rate hike and tight liquidity conditions which we saw in FY-22-23. So, any rate change won’t affect their borrowing immediately due to diversified borrowings.
Prior to that, we saw lower repo rate for the long time during Covid period i.e. FY-20-21/21-22.
Jump in terms of weighted average coupon looks very low (18bps) against the quantum of rate hike (60bps) for the said period but above explanation may help to understand that one of the reasons could be diversification in borrowings.
