Pump-Priming Talk Seen Driving Up Gilt Yields

If Union finance minister Yashwant Sinha's plan of pump-priming the economy actually takes off, increased government spending is expected to push the yields of government securities upwards, which have been dipping since the beginning of the financial year, said the analysts.

They said the Reserve Bank of India had been seen conducting auctions aggressively in the current fiscal signaling a slippage in the government spending. But, as the finance minister has asked the other ministries to increase spending, analysts expect the government borrowing programme to exceed the target amount by around Rs 20,000 crore.

Yashwant Sinha today in an interview given to a TV channel said he had asked other ministries to increase capital spending to push demand even at the cost of higher borrowing to push growth.

 

Says Indranil Pan, associate vice-president, Kotak Mahindra Capital Company, "If the government resorts to borrowing in excess of its budgeted requirement, it will have to tap the market at regular intervals. This will have an adverse impact on the market sentiment resulting in the yields on government securities perking up and their prices falling in tandem."

Economists, however, are not sure whether the increased spending will generate enough growth. Says Mohan Nagarajan, chief economist, Credit Analysis and Research Ltd: "It all depends upon how the increased expenditure will be managed which the finance minister has not made clear. In case of a mismanaged expenditure, the end result will be only a higher fiscal deficit."

Pan pointed out that the government would have to borrow more from the market even if there was no pump-priming of the economy. "Given the current depressed economic scenario, revenue collections would be lower than what has been projected in the budget leaving the government with no room but to resort to increased borrowing," he said.

Increased spending, in addition to that, will certainly push the borrowing programme in excess of the budgeted level, he added.