New Delhi: Easing liquidity into the system has become a key requirement for stimulating the slowing Indian economy. And the RBI has been trying to do just that by cutting key rates like repo, CRR and bank rates since September last year. But it seems the government’s effort to bridge its fiscal deficit with borrowings from the market may negate the objectives of the monetary policy being followed by the central bank.
Click here to watch video
The RBI has infused around Rs 4 lakh crore into the system since September 2008. But at the same time, it sucked out nearly half of this amount through its gross borrowings in government securities. The original budget estimate for fiscal 09 government borrowings stood at Rs 1.35 lakh crore. But it is now slated to touch Rs 2.51 lakh crore with the government borrowing Rs 70,000 crore more in January and Rs 46,000 crore more in February.
To borrow from the markets, the government issues bonds in the market that are then sold by the RBI. As the government undertakes more bond auctions, more and more money is getting locked in SLR or Statutory Liquidity Ratio bonds. RBI data shows that bank SLR holdings increased to 28.9% by early January from 25.8% in October 2008.
This means they have less money to lend to retail customers and corporate entities. Also, as the supply of bonds increases, so does the yield. In a failing policy environment, the banks then begin parking their funds in bonds leading to even less money for lending purposes. Going forward, the RBI will also find it difficult to cut rates further as increased government borrowings hamper its ability to do so.
While experts fret over increased borrowings and consequential fiscal deficit, the government’s financial advisors seem to dismiss any concerns. “The fiscal deficit should not be a concern now. The emphasis should be on growth,” says Suresh Tendulkar, EAC chairman.
But while the deficit gap may have been managed with borrowing for now, the incoming government, whoever it may be, will finds the job tough. It will find it increasingly difficult to borrow more money to revive the economy. And as the global economic growth slows down, the Indian economy may be just be stuck between a rock and a hard place.