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Friday, Apr 06, 2007
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Business Daily from THE HINDU group of publications Friday, Apr 06, 2007 ePaper |
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CRR & Bank Rates Industry & Economy - Economy Government - States RBI moves hit hard State govts C. Shivkumar
Bangalore April 5 The Reserve Bank of India's (RBI) monetary intervention has hit state governments severely and borrowing costs are expected to sharply escalate in the coming weeks. Top state government officials said here, "With Rs 45,000 crore siphoned out of the system, through CRR hikes, can borrowing costs remain low?" The reference was to three hikes in the Cash Reserve Ratio since December last year. But a finance secretary said that in the short term, there would be inflows through the National Savings Scheme (NSS) and small savings schemes. Collection on the schemes accrue to the states and interest rate on small savings is currently at eight per cent. However, the officials said, that as banks begin raising deposit rates, States would begin to feel the pinch.
Immediate impact
Moreover, the immediate impact would be on the state development loans (SDL). SDLs are funds raised through the RBI either through the tap route or through auctions. But irrespective of the route adopted, yields on SDLs are on the rise. Conventionally, all SDLs, despite the sovereign guarantee cover extended, have remained at a premium of 25 to 50 basis points over the ten year gilt yield to maturity (YTM). On Wednesday, ten-year yields hit a high of 8.15 per cent, the highest level since 2003. For the States this meant that they would have to cough up nearly 8.75 per cent, 75 basis points over small savings rate. As a result, the officials said, the preference was likely to shift in favour of NSS funds. Bank deposit rate hikes, however, would eliminate that opportunity also soon, they added, leading to a slowdown in accretions. Accretions to the NSSF estimated for the current fiscal is Rs 33,400 crore. Additional investments in special state government securities for the year are estimated at Rs 51,750 crore.
Estimates to go awry
The increased interest costs were likely to hit States' interest expenditure estimates. In fact, most of the States had prepared their budgets for the current fiscal year on the basis that market borrowing costs would be eight per cent. In fact some States such as Rajasthan and Orissa have already gone ahead to prepay some of their high cost borrowings, and refinance them at lower costs. More states were expected to adopt the same route for reducing their revenue deficits. But the officials said, State Governemnts were now having second thoughts about resorting to such refinancing methods. This was because the impact on interest costs would at best be minimal, the officials explained. In fact, the current regime implied that the States would be faced with far higher revenue expenditure, due to higher interest outflows. States such as Karnataka have had revenue surpluses partly due to reduced revenue expenditure. The sources said that the States were in fact planning to increase capital expenditure funded through borrowings. "That is no longer possible," the sources said. "Maintaining fiscal correction course will remain the priority," the sources said. This implied that planned capital expenditure increases would be put on hold by the States.
Related Stories: More Stories on : CRR & Bank Rates | Economy | States
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