As on December 17, the deposits of the Centre in the Reserve Bank of India (RBI) amounted to Rs 1,00,278 crore. Since November 2, these deposits have averaged Rs 84,000 crore till recently. The rising trend has been observed after the telecom transactions for spectrum allocation and disinvestment in public sector enterprises, strengthened by advance tax payments.
It is, therefore, difficult to understand why the government continues to borrow despite money being available. The borrowing only serves to generate avoidable interest payments, create an artificial shortage of liquidity and harden rates in the securities market. In these days of advanced financial planning and cash flow statements, it should not be difficult to time market borrowings for when they would be needed. Also, the deposits do not earn any interest. It is not inappropriate, since in the consolidated balance sheets of the central bank and government, the receipts and payments between them cancel each other. But there is a way for the government to earn interest. There are central banks that make use of deposit transfers between them and commercial banks to regulate money supply. Thus, if a central bank wants to increase liquidity, it auctions government deposits. Why can’t the RBI and the Centre think of this procedure?
A Seshan, Mumbai