Reserve Bank assures of ‘least disruptive’ govt borrowing

With the vote-on-account just ten days away,the Reserve Bank of India on Friday said that it would manage the government's additional borrowing programme in the “least disruptive manner”.

Written by ENS Economic Bureau | Mumbai | Published: February 7, 2009 1:51 am

With the vote-on-account just ten days away,the Reserve Bank of India (RBI) on Friday said that it would manage the government’s additional borrowing programme in the “least disruptive manner”. Yields on government bonds tumbled from a two-month high after RBI Governor D Subbarao said “all options are open” on borrowings and that the central bank had not decided on private placement of debt.

Bonds had declined for eight straight days on concern the government will increase debt sales to fund additional spending and spur growth. The yield on the 8.24 per cent securities due April 2018 declined 31 basis points to 6.19 per cent at the close. Simultaneously,the price rose Rs 2.28 per 100-rupee face amount to Rs 114.23. Subbarao commented that the RBI’s endeavour would be to keep the overnight interest rates in the corridor of 4-5.50 per cent. “The RBI will ensure financial markets remain stable. We will see there is no volatility and we will manage the government borrowing programme in the most efficient way possible,” Subbarao said on the sidelines of the 6th Convocation Programme at the Indira Gandhi Institute of Development Research in Mumbai.

Following the first and second supplementary budgets which together resulted in expenditure being 40 per cent higher than originally budgeted,the government increased its borrowing programme by an additional Rs 70,000 crore over its original estimate of Rs 135,000 crore. “However,given the sharp contraction in tax revenues seen during 3QFY09 and the low probability of 3G revenues coming in,the additional borrowing that will be announced on February 16 could be to the tune of Rs 50,000 crore which could keep pressure on yields,” said Rohini Malkani,an economist with Citigroup India.

Asked whether the RBI would consider tweaking rules for private placement of bonds,Subbarao said,“At this point,we have not decided. We are discussing with the government about the borrowing programme and how we need to borrow.”

The government raised its borrowing target for the year ending March 31 to meet extra spending plans as the government unveiled two stimulus packages to limit the impact of the global slump on economic growth. “All options are open — we will manage to borrow in a transparent manner,” he added. When yields decline,banks that have more securities in their ‘Held for Trade’ (HFT) and ‘Allowed for Sale’ (AFS) categories will make more profits as compared with banks that have majority of their portfolio in the ‘Held to Maturity’ (HTM) category. “We will maintain a very comfortable liquidity position. There are several options and measures that we can take to manage liquidity. We will explore and apply all of that as appropriate,” Subbarao said. Since mid-September the RBI has injected over Rs 4,00,000 crore into the economy.

Experts said one reason for the RBI inaction in the quarterly review of monetary policy last month was the uncertainty on the borrowings front. “The RBI wishes to be reactive in monetary management. It wishes to wait for an adverse development (the announcement of additional government borrowings,for instance) to cut rates or reserve ratios further,” said Abheek Barua,chief economist,HDFC Bank.

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