When borrowing drives out capital

The minister also announced that he would table the Public Debt Management Agency Bill,2012 in the current session of Parliament. The Bill proposes to set up an independent agency that would manage the borrowing programme of the Central government. The Reserve Bank of India would then be free to focus on its primary job of deciding on interest rates. But the market did not take the mammoth borrowing programme very favourably. The 10-year benchmark has,as a result,shot up by 9 bps after the budget and could stay in the range of 8.32-8.40 per cent for the remainder of March.

Bond yields could remain firm and ultimately set a floor to borrowing and lending rates. That,in turn,could impinge on investment demand and arrest growth, said Abheek Barua,Chief Economist,HDFC Bank.

Mukherjee plans to borrow substantially more from the bond markets next year Rs 5,60,000 crore in gross terms compared to Rs 5,10,000 crore largely because of a greater reliance on dated securities to fund the fiscal gap.