Mumbai: Managing the heavy government borrowing in a non-disruptive way is a major challenge for the Reserve Bank of India (RBI), as hardening bond yields run counter to its low rate policy needed for lifting growth, the RBI said on Thursday.
“The major challenge that confronts the Reserve Bank in the medium-term is to manage the government borrowing programme in a non-disruptive manner,” said the central bank in its report on trend and progress of banking in India for 2008-09.
“This is because the hardening of yields would go against the spirit of low interest rate regime that the economy requires in the current situation to revive economic growth,” it added.
“In India, the policy response has been predominantly driven by the need to arrest moderation in economic growth,” the RBI said.
The government plans to borrow a gross Rs4.51 trillion ($96.4 billion) from the market in the 2009-10 fiscal year ending March, and has sold bonds worth Rs3.15 trillion so far since April.
On Wednesday, the prime minister’s economic advisory panel chairman C. Rangarajan said Asia’s third biggest economy would grow at about 6.5% in 2009-10 and pick up speed the following year and grow 7 to 8%.
The economy grew by 6.7% in the last fiscal year, less than 9% or more in the previous three years and the government is fearful of choking off recovery.
The central bank said while the banking system has been relatively in good health, it needs to assess and initiate measures to raise the capital base of state-run banks.
“Balance sheets of the banks appear healthy and little affected by the unsettled conditions in financial markets. The asset quality and soundness parameters of the Indian banking sector have improved significantly in the recent period.”
It said the overall capital adequacy of banks was at 13.2% as of end-March 2009, well above 8% required by the Basel accord, and 9% as per local regulations.
It said financial reforms need to be carried out in a re-calibrated manner after the global financial crisis following Lehman Brothers’ collapse last year.
“The fact that India has not gone through any financial crisis as a result of financial deregulation is not only remarkable, but a testimony to the appropriateness of the judgement that reforms to global standards need to be adjusted to local conditions,” the RBI said.
Off-balance sheet items:
The central bank said off-balance sheet exposures of local banks declined by 26% in 2008-09, but it was necessary to monitor and evaluate risks from such exposure.
“The off-balance sheet exposures of banks, which had seen an exponential growth in recent years, witnessed some slowdown this year,” it said.
“It is however, necessary to constantly monitor and evaluate the risks entailed by such types of exposures of banks, given their systemic implications.”
The report also sounded a note of caution on securitization and asset derivative deals. “This reintroduction of securitisation has to be watched cautiously given the international experience with regard to the same,” it said.
The regulators need to be watchful of the invention of the new pooled asset derivatives, if they are perceived as a way to avoid regulatory capital requirements, the central bank said.
“It should be ensured that such schemes do not develop into a widespread form of capital arbitrage.”