Borrowings have to be frontloaded: Finance secy

NEW DELHI: RBI will support at least half of the government���s borrowing requirements for the current fiscal by purchasing bonds in the open market to boost liquidity, finance secretary Ashok Chawla said on Tuesday.

���It will be done in a manner in which it causes least disruption. It (higher borrowing) has to be supported by open market operations, at least by 50%....The idea is not to crowd out private investment,��� Mr Chawla told reporters.

Finance ministry and central bank officials would soon meet to finalise a new borrowing schedule, he added. The central bank injects liquidity by buying back regular bonds, apart from using its daily money market operations.
The government plans to borrow Rs 4,00,000 crore from the market during 2009-10, a rise of about 50% over what it borrowed a year ago. A substantial part of this would be frontloaded, according to a government official.

The bond market remained unsettled by Monday���s budget, where the government raised its forecast for fiscal deficit in 2009-10 to 6.8% of GDP, the highest in 16 years.

The budget poses upside risks to rates in terms of higher yields, as well as to inflation, due to its expansionary stance, said DBS economist Ramya Suryanarayanan.

"The budget has definitely increased those chances, and at a time when the economy needs more spending towards infrastructure for a sustainable recovery. More supplies (of government debt) will crowd that out," she said.

Piyush Wadhwa, senior VP at ICICI Securities Primary Dealership, said with cash conditions ample, loan growth muted and bank deposits rising, policymakers would be eager to complete the bulk of the borrowing in the next few months.

A jump in the 10-year bond yield to 7.50% due to the surge of debt would erase the effect of the central bank's easing, said Rajeev Malik, an economist at Macquarie Securities.

Mr Chawla said the government would withdraw the stimulus it has provided to bolster growth only after the economic recovery stabilises. He said the government had a clear road map to bring down deficit and was looking to reduce it by 1.5% over the next three financial years to 3% of GDP by 2012-13.

Meanwhile, rating agency Moody���s has expressed concern on India���s high fiscal deficit projection. It said cyclical deterioration in the country���s public finances could leave the authorities ill-equipped to tackle any external shocks that may happen in the future.