The finance ministry may have to factor in an additional expenditure of up to Rs 1,500 crore as interest payments for the Market Stabilisation Scheme bonds, adding to its expenditure concerns.
The ministry had provided for Rs 3,700 crore as interest outgo for the MSS in 2007-08, up from last fiscal by Rs 1200 crore. But the sum was expected for a bond issuance for Rs 1,04,595 crore of bonds.
But by the end of September, half way through the fiscal that limit has been breached. Rs 1,34,940 crore worth of bonds have already been issued. Market analysts said the bonds issuance would go beyond the Rs 1,50,000 crore at this rate.
In last fiscal, the government has issued MSS worth Rs 98,916.56 crore, which in any case was Rs 5,000 crore more than the anticipated sum of Rs 93,345.09 crore. The interest cost of the bonds was Rs 2,608.78 crore, against the projected sum of Rs 1,400 crore.
The sharp rise in MSS outgo could be a severe drain therefore on the government fisc. But analysts say the options are quite limited. The rush of dollars into the Indian market is continuing unabated. It is $11 billion till September 2007 and is $2.7 billion just in September. Of the latter, $1.54 came in the past 15 days after the US Fed rate cut.
The high inflow has pushed the rupee to a massive nine year high against the greenback. So the RBI has to take a call if it would let the rupee appreciate or mop up the additional dollar flow. The alternatives include either sustained auction of MSS bonds or a hike in the cash reserve ratio of the banks from the current 7%.
Hiking the CRR could be costly for the banks as they may have to respond to such sledge hammer tactics by raising their interest rates. The government is not keen that this should happen as the economic activities in different sectors are taking a downturn.
A rise in the interest cost for the finance ministry could, however, mean it would have to cut expenditure in other areas, to rein in the fiscal and revenue deficit. The total interest outgo for the government in this fiscal is expected to be Rs 1,58,994 crore. As the rates of interest rise, that sum too could be under a revision.