The Reserve Bank of India (RBI) will have little space to finance the government beyond fiscal 2009-10, global financial services firm Goldman Sachs said in a report that scrutinised the RBI's balance sheet.
"Our calculations show that the RBI can fund about Rs 1.5 trillion ($30 billion) of the governments borrowing needs without... Stoking inflation," the report said.
However, given the size of the deficit, this would still require the market to absorb more government bonds than in fiscal years 2007 and 2008. Further, it would leave the RBI with little space to finance the government beyond fiscal 2010, Goldman Sachs economist Tushar Poddar said in the report.
"...RBI can somewhat reduce the governments borrowing from the market in the near term, we believe it does not have balance sheet space to continue it beyond FY10," he said.
Goldman Sachs believes long-term government bonds may remain under selling pressure.
Poddar said they scrutinised the RBI's balance sheet to determine how much it could fund the government deficit and found that the RBI has some leeway due to the buffer it built over the past several years but might get exhausted quickly.
The Indian government has said it would sell Rs 2.41 trillion rupees of bonds in the April to September period of fiscal 2009-10. The amount is two-third of its target for the entire next fiscal year.