The Reserve Bank of India today said that higher bond yields, the result of higher government borrowings, had militated against the low interest regime required to spur private sector investments.
This is the first statement from the central bank acknowledging the adverse impact of such borrowings, which could crowd out private sector investments.
The yield on the 10-year government paper has moved up from 6.81 per cent on the eve of the Union Budget, announced earlier this month, to 6.94 per cent at the close of trading today, according to Bloomberg data.
However, the central bank maintained that various tools available with it in the form of open market operations (OMOs) and redemption of market stabilisation scheme (MSS) bonds have ensured adequate liquidity in the banking system. The central bank further said that it has enough headroom to ensure that the borrowing programme was carried out smoothly.
At the post-policy press conference, RBI Governor D Subbarao said the central bank could manage higher government borrowings as well.
Asked for his comments on the central bank monetising the deficit, the governor said, “We are not operating in the primary market. What we are doing is operate in the secondary market. Both lead to monetisation, but we are doing only that part which is permitted.”
The first quarter review said that liquidity was not a major problem. During the first half of 2009-10, the planned OMO purchases and MSS unwinding would add primary liquidity of Rs 1,50,000 crore — which was equivalent to a reduction in the cash reserve ratio (CRR) by over 3.5 percentage points.
RBI said that this would help it to conduct government borrowing without crowding out the present or potential private credit demand, which remained subdued at present, but was projected to pick up in the second half.
| GOVERNMENT BORROWING: 2009-10 (Rs crore) | |||||
| Item | 2007-08 Actual | 2008-09 Actual |
2009-10 | ||
| Interim Budget estimates | Budget estimates (BE) | % increase in BE over 2008-09 | |||
| CENTRAL GOVERNMENT | |||||
| Gross market borrowings # | 1,88,215 | 3,18,550 | 3,98,552 | 4,91,044 | 54.2 |
| Net market borrowings | 1,08,998 | 2,98,536 | 3,08,647 | 3,97,957 | 33.3 |
| STATE GOVERNMENTS | |||||
| Net market borrowings | 56,224 | 1,03,766 | 1,26,000* | 1,40,000* | 34.9 |
| Total net market borrowings | 1,65,222 | 4,02,302 | 4,34,647 | 5,37,957 | 33.7 |
| # Pertain to dated securities and 364-day treasury bills * Estimated. The state governments have been allowed to borrow an additional 0.5 per cent of gross state domestic product (GSDP) as part of the fiscal stimulus package in 2008-09 and another 0.5 per cent of GSDP in the Union Budget 2009-10, raising their budgeted borrowings in 2009-10 to 4 per cent of GSDP | |||||
MSS is a liquidity management facility which was introduced in 2004 to manage surplus liquidity in the system by issuing treasury bills or short-term government papers.
The review has reiterated that the central bank would endeavour to maintain a policy stance that aided return of the economy to a high growth path. At the same time, it identified the large borrowing programme of the Centre as a major challenge.
With gross borrowing of the Centre proposed to cross Rs 400,000 crore this year, the government and RBI have decided to front load the borrowing calendar. The government would now raise Rs 299,000 crore by September through market borrowings, instead of Rs 241,000 crore planned earlier and Rs 106,000 crore raised during the first half of 2008-09.
