The Hindu Business Line : `Need to calibrate carefully Govt market borrowings'

THE Central Government has completed nearly 50 per cent of gross market borrowings aggregating Rs 75,044 crore up to October 21, according to the mid-term review of the RBI annual policy statement for the year 2004-05.

The volume of first half borrowings, lower than usual, was primarily due to the surplus cash balance of Rs 26,669 crore at end-March 2004 and the higher subscription coming from market participants other than banks.

The weighted average yield on Government borrowings has been 5.76 per cent (up to October 21), lower than 5.90 per cent in the previous year.

With larger-than-usual borrowing slated for the next half of the fiscal, in a scenario of tightening interest rates and growing credit demand, the programme needs to be calibrated carefully. Higher cost of borrowing could result in a higher fiscal deficit for the economy; hence careful deliberations will be required before framing this programme for second half of the fiscal, said the mid-term review statement.

Inflation is an immediate and looming concern over the money market than higher cost of borrowing for the Government, said money market participants.

"Even if cost of borrowing rises by 1 per cent or increases by Rs 1,500 crore, it will not have a major impact on the economy. If the inflation is not reined in, it might lead to a turmoil, not only in the bond markets, but also in the economy," said a trader.

The Government is slowly turning around to realise that the high inflation levels are a result of not only substantial money supply but also demand for commodities, he said. Although cost of borrowing is likely to increase, issuing short-dated papers or floating rate bonds could restrain debt-servicing burden to some extent. Such papers usually get a better response and are also subscribed at lower rate levels than the longer tenor papers, said a money market participant.

Excess liquidity in the system was drained through the market stabilisation scheme (MSS) during 2004-05; liquidity absorption was to the tune of Rs 54,146 crore up to October 21, 2004, said the review. Repo volumes under liquidity adjustment facility declined as a consequence, from an average of Rs 70,523 crore in April to Rs 13,805 crore in October 2004.

Bond market participants are divided on their view of MSS, with a certain section considering it a measure that has outlived its relevance and another faction having concerns on the liquidity front if it were discontinued.

"MSS does not have an adverse impact on the bond markets, as it comprises primarily short-dated securities. Liquidity mopped up is back into the system in a matter of few months, so discontinuing MSS would lead to excess liquidity flowing back into the system," said a trader.

There is a possibility that before each auction of Government paper, the MSS auction might be postponed to provide enough liquidity to subscribers of the paper, he said.

"Bond market is likely to be short-sighted, taking an auction-to-auction view, rather than a long term view," said Mr Ajay Mahajan, Group President, Financial Markets and Private Banking, YES Bank.

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