Govt borrowing likely to be smooth: RBI

The Reserve Bank today said the government borrowing for the next fiscal is unlikely to pose any major challenge to it, provided it remains within the budgeted target.

"We don't expect the government borrowing requirements to be a huge challenge...(however) there is risk if private sector demand and government borrowing requirement go up more than expected, and capital inflows also become lower than expected. These are among the risks we have to keep a watch on," RBI deputy governor Subir Gokarn told reporters here.

The government has a gross borrowing target of Rs 4.57 trillion in 2010-11 as against Rs 4.51 trillion in the current fiscal. Out of this, the net borrowing for the next fiscal is estimated to be around Rs 3.45 trillion.

Gokarn said the economic recovery is becoming stable and broad-based. This, coupled with comfortable global liquidity conditions, will help the central bank manage the government borrowings smoothly.

"We do expect credit demand to accelerate because the recovery is clearly starting to show some stability and is becoming broad-based. We have to match this against the overall growth in deposits, which is one source of funding for borrowing requirements," Gokarn said.

Although the government borrowing is not a major concern, it could pose challenges if its requirement and loan demand from the private sector overshoot the estimates, Subir Gokarn said, adding it is also important for the RBI to manage the borrowings within the scheduled time.

Last year, the central bank had enough cushion with respect to the Market Stabilisation Scheme and the possibility of open market operations to manage liquidity, which may not be useful tools in the current scenario, Gokarn noted.

"We could do open market operations in a situation where the economy was slowing down and inflation was declining. We cannot use that channel to create liquidity now," Gokarn said.

He further noted that the banking system has some cushion currently through their holdings in the statutory liquidity ratio, Gokarn said.