Huge debt to crowd out private players

BORROWINGS AND INTEREST RATES

Bankers predict pressure on interest rates saying huge borrowings will suck out liquidity resulting in reduced lending.

The large government borrowing is expected to put pressure on interest rates. For the current financial year, the government’s budgeted borrowing is Rs 4,00,996 crore, 22.81 per cent higher than the revised estimate of Rs 3,26,515 crore in the last financial year and over three times the 2007-08 borrowing. Compared with the estimate of Rs 3,32,835 crore in the Interim Budget, presented in February, the total borrowing is expected to be 20.47 per cent higher.

A senior treasury executive at Bank of Baroda said apart from the Centre, the states were also likely to borrow more to fund their growing expenditure. “This will put further pressure on resources available in the market,” he said.

“I do not expect much reduction in interest rates,” said Axis Bank Managing Director and CEO Shikha Sharma.

Higher borrowings will suck out liquidity, leaving less scope for banks to lend.

“That is a possibility. If government borrowings go up, it can crowd out private borrowing and push up interest rates. But how the monetary policy deals with the situation is the other aspect. The Reserve Bank of India will provide clarity,” said Union Bank of India Chairman and Managing Director MV Nair.

“It depends on how the government and the RBI manage the borrowing plan. It can be managed through measures such the market stabilisation scheme, open market operations and timing the borrowings,” said a banker.

Mukherjee’s borrowing plan sent the bond market in a tizzy with the yield on ten-year government paper crossing the 7 per cent level for the first time in over a month. Higher bond yields, which mean lower prices, will also affect the treasury income of banks, which are already dealing with rising provisions on account of higher delinquencies.

A public sector bank chief said that risk-averse private players would use the opportunity to park funds in sovereign instruments instead of lending, which they viewed as a risky activity.

“As economic revival sets in and high fiscal deficit becomes a potential bottleneck, monetary policy may have to be adjusted to take care of issues pertaining to fund availability – which in itself may not have too much room,” said Kaushal Sampat, chief operating officer at Dun & Bradstreet-India.

“If the spending is part of the stimulus and front-loaded, this will mean that around Rs 71,000 crore will be borrowed over the next three to six months. So, we are staring at Rs 4,000-5,000 crore of additional borrowing every week over and above the Rs 8,000 crore additional borrowing that has already been announced. So, this is quite bearish for bond market yields,” said B Prasanna, MD & CEO, ICICI Securities Primary Dealership. The other option, he said, was to spread the additional borrowings over nine months so that the impact was limited.

While the numbers in the Budget estimates included drawdown of cash balances, a clearer picture would emerge once the government released the borrowing calendar, said experts.

While market participants were expecting fiscal deficit in the range of 6-6.5 per cent of the gross domestic product (GDP), the finance minister put the number at 6.8 per cent of GDP.

While Mukherjee has been in increasing expenditure, he has not budgeted for disinvestment receipts or money from sale of spectrum to third generation mobile telephony service providers.