Opinion Banking on RBI

Till date,the government has borrowed Rs 1,90,000 crore,of which Rs 28,000 crore has been by way of desequestering the MSS (market stabilisation scheme) bonds to the government books. MSS bonds,also called intervention bonds,were floated by the RBI during 2004-07 to mop up excess rupee liquidity caused by the central bank’s intervention in the foreign exchange market. Those were the heady days when foreign investors flooded India with dollars and the RBI stepped in and bought dollars to prevent a sharp rupee appreciation. A strong domestic currency hurts exporters because their foreign earnings result in lesser rupees. The resultant rupee liquidity was mopped up by the RBI by floating MSS bonds.

Even before the scheduled meeting of the finance ministry with the RBI on July 17 to discuss the borrowing strategy for the year,Finance Secretary Ashok Chawla has set the ground rules. He wants the RBI to support the government’s budgeted borrowing programme to the extent of at least 50 per cent by undertaking open market operations (OMOs). In OMOs,the RBI buys back regular government bonds and injects liquidity into the system. The RBI has,so far,conducted OMOs to pump in Rs 28,000 crore against the first half target of Rs 80,000 crore.

Unfortunately,even as the RBI has little choice but to facilitate such a borrowing plan,the government could have done a better job by managing market expectations better. The Budget could have been more transparent on the government’s assumptions when it comes to some key variables that can have a significant impact on its borrowing needs. Two of these variables that impact a huge oil importing country like India’s finances are: global crude oil prices and the exchange rate. While finance ministry officials struggled to put a number to these,they were in for the first shock — a Rs 30,000 crore demand by the petroleum ministry to compensate oil PSUs for potential losses if global crude oil prices continue to hover around $70 a barrel. Higher prices also adversely impact fertiliser subsidy. The fertiliser department may not have approached the finance ministry with any fresh demand,but that is no solace.

The low disinvestment target also takes a lot away from transparency. In the last two days,government officials have discreetly stated that stake sale in PSUs could fetch them at least Rs 10,000 crore. Given that the finance ministry is already exploring ways to use these proceeds for funding social sector schemes,mention of a realistic target would have had a sober effect on the markets. For the bond trader,it means lower borrowings. Bond markets respect transparency in numbers,not convoluted logic on why it has not been possible.

The other big doubt is on the government’s ability in spotting the recovery as and when it happens,and then its willingness to step back. There are doubts on both,and it is this uncertainty that keeps the market spooked. It is easy for Mukherjee or any government for that matter to let deficits slip out of their hands. But sticking to targets — of paring the fiscal deficit by 1.5 per cent of GDP a year over the next two years — is really sticking the neck out. It assumes India will return to the 8-9 per cent growth target next year itself and not need any stimulus.

Mukherjee could have,at least,reaffirmed the UPA’s commitment to set up an independent debt management office,relieving the RBI of at least one of its many mandates — that of being the government’s investment banker. But he has chosen to keep quiet,letting the central bank handle multiple and conflicting roles of managing the government’s burgeoning funding requirement,keeping inflation and interest rates low and also ensuring growth.

vaidyanathan.iyer@expressindia.com