Govt Stepped Up Borrowings To Tame Liquidity: Socgen

The government is taking advantage of low treasury bill yields to borrow aggressively, SocGen Crosby Research said on Thursday.

"This is part of Reserve Bank of India (RBI)'s strategy to control the excess liquidity generated by a sharp increase in foreign exchange reserves," SocGen Crosby economist Sanjeev Sanyal said in a report. "In fact, the government has already completed 34 per cent of its total borrowing programme for financial year 1998," the report said.

"However, there is now so much excess liquidity in the financial system that treasury bill yields have remained at historically low levels despite the high level of borrowings."

 

"The RBI's proactive operations suggest that it is now becoming more adept at using monetary tools to fine tune the economy," it said, recalling that the apex bank had merely reacted to crises in earlier years. "The RBI is now taking forward-looking measures aimed at smoothening the trajectory of an economic recovery," it said.

SocGen cited three beneficial effects of RBI's strategy. The government will be able to complete its borrowing programme for fiscal 1998 at currently prevailing low interest rates, thus reducing the pressure of servicing the public debt.

Second, there will be less pressure on the financial system from government borrowings in the second half of this year when growth in industrial credit and an increase in imports will begin to tighten liquidity.

Finally, the RBI's open market operations will sterilise much of the inflationary impact of the forex inflows at a time when the inflation rate is under threat from an imminent fuel price hike.

Sanyal said RBI successfully stabilised broad money growth. "In earlier years, M3 growth fluctuated wildly between 14 per cent and 19 per cent year-on-year.

However, in recent months, the apex has been able to narrow the range significantly to 15.8 per cent to 16 per cent year-on-year," he said.

"This will allow the central bank to keep inflation within control despite price shocks such as an increase in domestic fuel prices. We expect inflation to average 8.1 per cent in financial year 1998, above the current levels but well within acceptable limits in India."