Govt borrowing a bigger challenge this year: RBI

The Reserve Bank,which hiked its key rates by 25 basis points,said its task of managing the Rs 4.57-lakh-crore government borrowing this fiscal will be a bigger challenge than it was last year.

The Reserve Bank,which hiked its key rates by 25 basis points on Tuesday,said its task of managing the Rs 4.57-lakh-crore government borrowing this fiscal will be a bigger challenge than it was last year,in the face of the rising private demand and high inflation.

Finance minister Pranab Mukherjee,however,said there will be enough liquidity in the market which will leave enough funds for both private sector credit needs as well as the government’s massive borrowing programme.

“Going forward,private credit demand is expected to pick up further. Meanwhile,inflationary pressures have also made it imperative for the RBI to absorb surplus liquidity from the system. Thus,managing the borrowing of the government during 2010-11 will be a bigger challenge than it was last year,” RBI said in its annual monetary policy on Tuesday.

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Mukherjee,on the other hand said,”at the same time there would be enough liquidity available in the market so that prospective investors do not find any fund shortage and the government borrowing programme is also not disturbed.”

To cool off the runaway inflation by squeezing money supply,the apex bank today hiked its repo,reverse repo rates (short-term lending and borrowing rates) and mandatory banks reserves (CRR) by 0.25 percentage points each to 5.25,3.75 and 6 per cent respectively.

The CRR hike,which will come into effect from April 24,would suck out Rs 12,500 crore excess cash from the nation’s banking system.

Last year,the central bank could comfortably manage the government borrowing programme using the cushion of unwinding of the market stabilisation scheme and through open market operations,the apex bank said. Besides,the borrowing was facilitated by the sluggish private credit demand and comfortable liquidity condition last fiscal,it said,adding it may not be so during this fiscal as economic recovery is expected to push up private demand moving ahead.

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The government’s gross borrowings in the current fiscal is pegged at Rs 4.57 lakh crore as against Rs 4.51 lakh crore in the previous fiscal. With the government planning to borrow nearly 63 per cent of its total borrowing needs in the first half of FY11,there is a fear in the market that it may leave little liquidity for the private sector,technically called crowding out of the private sector.