The actual monetised deficit of 1997-98 is expected to much lower than the Rs 16,000 crore projected in the budget.
The Rs 16,000 crore figure during 1997-98 represents the ex-ante level of the Reserve Bank of Indias (RBI) support to central governments market borrowings.
The fundamental reason for the monetised deficit being lower is that banks flush with funds have flocked to the auctions and consequently there has been not any significant devolvement on RBI.
The net RBI credit to the government has recorded a decline by Rs 8,947 crore in the current financial year while net bank credit to the government has increased by Rs 30,750 crore. Consequently, net bank credit (from RBI as well as banks) to government has increased by Rs 21,803 crore between March 31 and October 10 representing a 7.5 per cent increase.
The year on year increase in net bank credit to government is 12.2 per cent. The net RBI credit to the government would differ from the banks support to the government borrowings programme.
The budget has estimated a monetised deficit of Rs 16,000 crore during 1997-98 representing the ex-ante level of RBIs support to central governments market borrowings.
It is expected that the actual figure will be much lower on account of two factors. Flush with funds banks have flocked to the auctions and there has not been any significant devolvement on RBI. The central bank has converted a portion of its stock of special securities into marketable dated securities. If RBI sells these securities in the market then its support to the government will slip further.
If there are no fresh auction of government securities in the current financial year and RBI conducts its open market operations in an aggressive manner to mop up liquidity subsequent to the phased reduction in the cash reserve ratio, there would be a further decline in RBI credit to government.
For the year 1996-97 the government had estimated that the conventional deficit was to the tune of Rs 6,900 crore while according to RBIs estimates, the figure was Rs 13,156 crore.
However the monetised deficit was only Rs 1,934 crore. While the budget deficit widened, thereby putting pressure on government borrowings, the comfortable liquidity position prevailing for the large part of 1996-97 enabled the central government to meet its financing requirement from the market without any significant monetary impact, observes the RBIs Annual Report or 1996-97.
Even if the government does overshoot its budgeted borrowing programme for 1997-98 it is expected that it can resort to a private placement with the central bank without affecting any of the projections.
