The sharp decline in savings mobilized by NSS in September might raise alarms in the fiscal managers offices. Although that money is likely to be routed through government treasury bills, it might not build any inflationary pressure, but rather increase opportunity cost of commercial banks deposit mobilization.
The money raised by NSS peaked in March (Rs63 bn) with an average flow of Rs34 billion, since the start of calendar year, reduced to mere Rs7 billion in September after Rs36 billion and Rs 20 billion were mobilized in July and August, respectively. However, the quarterly inflows are in line with the fiscal year target of Rs240 billion.
The decline in rates on Special Savings Certificates - which attracted most of the NSS inflows in the last six months - by 140 bps to 11.6 percent in July amid ease of investment in T-Bills at attractive rates by non-banking institutions and corporates, led to the fall in savings routed to government papers.
The secondary market yield of the 12-month government paper has been on a gradual increase since the start of this fiscal year - jumping from a monthly average of 11.6 percent in July to 12.5 percent in September. Since the 12-month paper is the same risk bond as SSC with low locking period, the 90 bps return over and above the Special Savings Certificates in September drove institutional NSS investors to government papers.
Lately, the money market and fixed income mutual funds have shown more inclination towards investing in T-Bills - as of September, 13 funds had invested Rs14 billion (26% of net assets value) in T-Bills. This not only allowed corporations to easily access the government papers but also paved way for small individual investors to park money in T-Bills.
But the important question is what is the fate of NSS inflows and how will it impact the fiscal gap. With the cut-off yield of 12-month paper falling by 30 bps to 12.22 percent in yesterdays auction, the flows might not revert back to NSS.
This assertion is based on two things. First, the fall in T-Bills rate is in line with expectations of a downward revision in discount rate by 50-100 bps in the upcoming monetary policy - however, since no further revision is expected in the next six months or so, the secondary market yields after adjusting to this cut-off yields may remain in the vicinity of 11.8 to 12.5 percent. So, unless there is an upward revision in NSS rates, which is very unlikely, this avenue may not remain attractive for institutional investors.
Second, with the launch of NITs Government Bond Fund that has an investment policy to invest in minimum risk government securities, individuals and employee benefit funds of corporations will find NITs GBF more appropriate to invest than NSS.
Hence, there is a fair chance that government might miss its yearly target of Rs240 billion earlier planned to be generated through NSS, because that money will be likely routed to other government papers to fill its fiscal appetite.
However, there is a catch that the government has to meet its net zero quarterly target of borrowing from the central bank and in order to comply with this condition, fiscal managers might not raise new money, owing to which T-bills will keep transferring hands from commercial banks to mutual funds and other institutions and vice versa. And with the banks reluctance to lend money to private borrowers, high demand of government papers might not allow its return to spike.
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