Govt set to fast-track borrowing to avoid interest rate pressure

Comfortable liquidity may prompt RBI to defer gilts buyback.

The government is planning to fast-track its market borrowing programme to avoid pressure on interest rates in the second half of the year, when private credit demand picks up. The issue will be discussed at the cash management meeting with the Reserve Bank of India (RBI) tomorrow.

The government has already borrowed Rs 100,000 crore to date, and plans to borrow another Rs 140,000 crore by September. The means the total borrowing in the first half will be Rs 240,000 crore, compared to Rs 260,000 crore for all of last year.

The government is also under pressure because higher expenditure in 2008-09 on account of pay increases and tax breaks forced it to suspend a Parliament-mandated fiscal responsibility target. The fiscal deficit, an indicator of gross borrowing, for 2008-09 has been estimated at 6 per cent of GDP against a target of 2.5 per cent.

The issue acquires urgency because the cash balance with RBI is just Rs 100 crore and there is already an overdraft of Rs 7,380 crore under the ways and means advance (WMA).

WMA is the route through which the government takes loans from RBI for its expenditure. The ceiling is Rs 20,000 crore for the first half of a financial year and Rs 10,000 crore for the second half.

Sources familiar with the developments said RBI proposes to stretch the maturity of government papers so that borrowings and redemptions are staggered over a longer period. This means most of the government papers will be of medium- to long- tenure (15 to 38 years). The maximum maturity of government securities is currently 35 years. Longer tenures will also create good investment avenues for insurance companies and pension funds and take the pressure off banks in subscribing to these papers.

For short-term funds, there is a proposal to increase the number of 364-day treasury bills. The RBI governor has already expressed concern over the government's enlarged borrowing programme and its impact on interest rates.

The meeting will also decide whether RBI should defer the proposed buyback of Rs 80,000 crore worth of government securities. Officials think the buyback, which is required to build up the stock of securities with RBI to infuse liquidity, is not needed at this point. On the other hand, there is a sufficient supply of securities to be issued under the borrowing programme to draw out excess funds in the system.