The Reserve Bank of India (RBI) doesn’t expect managing next year’s record government borrowings to be a “huge” challenge, Deputy Governor Subir Gokarn has said.
“We have a scenario of Indian growth looking fairly positive and global liquidity still looking fairly comfortable,” Gokarn told reporters in Mumbai today. “So, taking all these factors into consideration, we don’t expect the borrowing requirement will be a huge challenge to meet.”
The yield on the benchmark 10-year bond reached a near 17-month high this month. The government’s debt sales would rise to Rs 4.57 lakh crore ($100.5 billion) in the financial year starting April 1 from a record Rs 4.51 lakh crore in the previous year, Finance Minister Pranab Mukherjee said in his Budget speech on February 26.
“The rise in yields is presumably in itself an outcome of markets now factoring in the overall borrowing requirement,” said Gokarn. “There is presumably some perception of liquidity tightening.”
The central bank absorbed Rs 39,200 crore at its reverse repurchase auction today, its lowest level since December 24.
Gokarn said the central bank had to deal with issues such as distribution of debt sales over different maturities and so “we don’t get too much pressure at some point on the yield curve.”
Bond prices might be declining also on expectations of accelerating inflation, Gokarn said. Inflation might accelerate to double digits, stoked by higher food prices, he said, adding prices won’t “persist” at that level.
India’s inflation quickened to 8.56 per cent in January, the highest in 15 months, from 7.31 per cent in December.
Reserve Bank of India Governor Duvvuri Subbarao said on March 8 that while bond yields had risen, they were still “reasonable” and he expected inflation to “moderate in weeks and months ahead.”
The central bank has kept the key reverse repurchase rate, at which it absorbs cash from banks, at a record low of 3.25 per cent since April. In January, it raised the proportion of deposits lenders need to keep as cash reserves to 5.75 per cent from 5 per cent.
“Yields have hardened a little bit,” Subbarao said. “We’ll manage the programme in such a way that yields are within reasonable limits and interest rates don’t have a negative impact on the competitiveness of the economy.”
The world’s fastest-growing major economy after China might expand 8.2 per cent in the 12 months from April 1, compared with an estimated 7.2 per cent this year, India’s finance ministry forecast last month.
