Hardening of interest rates in future due to huge market borrowings by the government remains a concern, even as RBI kept all its signalling rates unchanged in the first quarterly review of the monetary policy, Assocham President Sajjan Jindal said here today.
"Interest rates could inch up due to huge government borrowings. That is a worry," Jindal, who is heading a visiting business delegation to promote SEZs, said while reacting to the RBI's quarterly review.
He said the RBI's move not to change policy rates or reserve ratios is on expected lines.
However, the central bank is conservative so far as GDP growth rates projections are concerned, he said.
RBI has projected the Indian economy to grow by six per cent this fiscal.
Jindal said Assocham in its study said the Indian economy could clock a growth rate of seven per cent this fiscal.
Even then, GDP growth is not stable or high, he said, adding any upward pressure on interest rates due to high government borrowings could impact the economy.
As such, interest rates should not be allowed to move up, he suggested.
The government has pegged its borrowings at over Rs 4.5 lakh crore for the current fiscal, 70 per cent of which would come in the first half itself, to finance the ballooning fiscal deficit, projected to widen to 6.8 per cent of GDP during 2009-10.
In the quarterly review of the monetary policy yesterday, RBI also said managing the government’s borrowing programme for 2009-10 remains a challenge. The apex bank will meet the challenges of spurring private credit demand by maintaining policy rates and liquidity conditions conducive, it added.
Many quarters have expressed concerns that huge borrowings will jack up interest rates and crowd out private investment, while the government has allayed these fears.
Jindal suggested that the government should further promote FDI to counter any liquidity problem due to its borrowing programmes. In fact, FDI of $25-30 billion is expected also for the current fiscal as imports have fallen due to softening crude prices, he added.
The central bank also said large fiscal deficit, if continued beyond the recovery period, can crowd out private investment and trigger inflationary pressures.
The central bank said the government will need to return to the path of fiscal consolidation.
