Govt can borrow R4.9 L cr easily in FY13: FM to RBI

Written by Sunny Verma | New Delhi | Updated: Mar 30 2012, 08:27am hrs
The finance ministry has assured the Reserve Bank of India (RBI) that the country can borrow up to R4.9 lakh crore from the market without any disruption. This is R20,000 crore more than the R4.7 crore of net borrowing planned by the government in the next fiscal.

The ministry assured the RBI of the borrowings going through smoothly, even as it pressured the central bank at a recent meeting to cut interest rates. Bond markets fell drastically after the government announced that it would borrow 65% of the total debt in the first half of the next fiscal.

Experts, however, said the bloated borrowing programme would put pressure on yields, pushing up the governments borrowing costs significantly. It would also add to the pressure on liquidity in the banking system. They said that the RBI would have to conduct open market operations (OMOs), through which it buys back bonds from the market, to ease pressure on the bond market.

The RBI bought bonds worth R1.4 lakh crore through OMOs in 2011-12 as compared to R0.78 lakh crore in 2010-11.

Finance ministry officials are increasingly taking the view that the high interest rates are now adding to inflation rather than controlling it a view strongly opposed by the RBI. The ministry is suggesting the that the central bank cuts interest rates in order to lower the governments borrowing costs.

Expressing concerns around the fiscal consolidation plan, the RBI has refrained from a rate cut. It said unless the fiscal policy is tightened, the demand pressures in the economy are unlikely to come down.

The government is borrowing a highest-ever amount next fiscal appropriating nearly 80% of the annual deposit mobilisation of the banking system to bridge the fiscal deficit of 5.1% in 2012-13. Net borrowings in the first half of next fiscal will be Rs 2.84 lakh crore, which is nearly 50% higher than the net borrowing in 2011-12.

The size of the weekly debt auction is Rs15,000-18,000 crore, and this huge debt supply is likely to weigh on the bond market. We expect yields on the benchmark 10-year G-securities to edge higher to 8.70-8.75% in coming months, said Kotak Mahindra Bank chief economist Indranil Pan.

The government is hoping actual borrowings to come lower than the Budget estimates. Economic affairs secretary R Gopalan said this could happen in case there is a pick-up in inflows into small savings. The government has raised the interest rates on small savings by up to 50 basis points. Once the Reserve Bank lowers interest rates, small savings are expected to turn attractive.

But market players do not expect any immediate reprieve from the central bank, which reviews monetary policy in April. Interest rates are not expected to move downwards unless the RBI starts lowering interest rates. This is not expected this April given that inflation is still high as is the potential generated by the tax proposals in the budget as well as the tenuous global oil situation, said Care Ratings chief economist Madan Sabnavis.