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In the backdrop of the central government's move to shift debt management away from the central bank, the latter has said the high government borrowing programme is a constraint for creation of a deeper corporate bond market.
"The huge supply of government paper in the country is one of the major impediments to the growth of this market," said R Gandhi, deputy governor at RBI, at an event here on Monday.
The finance minister's Union Budget has proposed creation of a Public Debt Management Agency to manage the government's borrowing. This is a job performed till now by RBI. The stated reason is to avoid the conflict of interest - if RBI manages government borrowing and if inflation is high, the central bank will prefer higher bond yields, which in turn will increase the government's cost of borrowing.
Central bankers feel a pre-condition for shifting the debt management function from RBI is to lessen the government borrowing programme. This hasn't happened, with the government's market borrowing remaining elevated over the years.
Presenting data which pointed to an inability of the corporate debt market to grow, Gandhi said every year, the government borrowing growth is "unabated". It borrowed Rs 5.92 lakh crore in 2014-15 and plans to borrow another Rs 6 lakh crore from the market in 2015-16.
"If we compare with the government bond market, the corporate bond market is dwarfed," he said. As a percentage of gross domestic product (GDP), government bond issues were 49.1 per cent and corporate bonds at 5.4 per cent in 2013.
However, the deputy governor welcomed the government's fiscal consolidation plan as a step in right direction, aiding the deepening of the corporate debt market. The Union Budget deferred the earlier fiscal consolidation road map by a year and said the target of a fiscal deficit not exceeding three per cent of GDP would be reached by 2018.
"We have seen that the government is progressively trying to reign in the deficit at the absolute level, which will put less pressure on the market," he said.
RBI's move to gradually reduce the Statutory Liquidity Ratio, the amount of compulsory government bond holdings for banks, will also be beneficial for the corporate debt market, he said.
With the banking system facing rising levels of non-performing assets, shifting to the corporate bond market for funds is very desirable, he added.
He said he wanted companies to have more public issues of debt rather than the current practice of private placements. In a related remark, Gandhi said the role of institutional investors such as pension funds, provident funds and insurance companies must be reassessed.
"They do need to take some initiative and be aggressive in actively managing their portfolios. Their investment horizons should not be confined to 'AA' (rated) and above instruments only," he said.
On foreign portfolio flows, Gandhi said these were reviewed from time to time. "We have been consistently monitoring the level of flows in this segment. The limits we have kept are based on such assessment. If there should be full utilisation of the limit, we will have to review the situation vis-a-vis the country's total external debt position," he said.
