Mumbai: India’s combined fiscal deficit is likely to narrow slightly to 10.3% of the country’s gross domestic product (GDP) in the fiscal year starting 1 April, from 10.8% in 2008-09, Nomura said in research note on Tuesday.
The government’s gross market borrowing is seen at $83 billion in FY10, compared with the government’s estimate of Rs3.62 trillion ($70.1 billion).
Funding such a large deficit would be the key challenge for the government and the onus of conducting the market borrowing in a non-disruptive manner would lie with the central bank (Reserve Bank of India), Sonal Varma, economist at Nomura, said in a note.
The government could consider privately placing the bonds with the central bank as an option, while issuance of shorter-term dated bonds and treasury bills to reduce risk duration for banks would also help, she added.
“At a time when banks are wary of taking additional interest rate risk on their balance sheets, the RBI may have to fill the gap by expanding its own balance sheet through deficit financing,” Varma said.
Nomura also expects the government to announce an additional 0.6% of GDP of planned expenditure at its final budget in June/July.
“On the fiscal policy front, little is likely to happen until after the May elections because the election code of conduct,” Varma wrote.
Nomura expects the RBI to further reduce its key short-term interest rates by 100 basis points each in tranches of 50 bps between April and June.
“We judge that the reluctance of banks to cut rates and lend, and a heavily geared government are diluting the transmission of stimulus to the economy,” the note said.
“The bottomline is that the policy action is nearly over; policy effectivemenss is now the key,” Varma wrote.