FINANCIAL markets were once again caught between the soundbites by an unnamed finance ministry official worried about rising bond yields and RBI deputy governor’s statement on Thursday that the central bank expects the borrowing programme to sail through comfortably.
However, RBI did give voice to the market’s worst fears that a credit hungry private sector and possible rise in the government’s borrowing, could come in the way of its successful execution of the sovereign borrowing programme.
“I keep talking to RBI people everyday on yields. They keep saying the yields are hardening because of inflationary expectations (despite the net borrowing target being low),” a finmin official was quoted saying a news agency. But deputy governor Subir Gokarn, at a seminar here, did flag off the central bank’s concerns on a possible rise in government’s borrowings. “There are risks that private sector borrowings would be higher than expected, the foreign
inflow could be lower and the government borrowing could be higher than anticipated,” he said.
Dealers and economists said the statement showed that RBI is gearing itself to tackle uncertain economic scenario, and expressed confidence that the central bank would rise to the task. Government bond prices rose on Thursday amid a rise in food prices fuelling inflation worries. Mr Gokarn, however, added that the Indian growth is looking fairly positive and global liquidity should help in the smooth sailing of the market borrowing programme.
The government has announced an overall borrowing programme of Rs 4.57 lakh crore for 2010-11 against Rs 4.51 lakh crore in the current year. The net borrowing target is set at Rs 3.45 lakh crore against Rs 3.98 crore borrowed this year, thanks to the large number of scheduled bond redemption next fiscal.
“At some point of time, RBI will have to face a reality where corporates look to boost investments,” said Jahangir Aziz, chief India economist at JP Morgan. “If an 8% GDP growth has to be achieved, then we cannot let the private sector run out of gas,” he told ET. He feels it’s unlikely that RBI would raise rates until the next policy review.
The yield on the 10-year benchmark bond has risen 30 bps in the past month on fears that rising wholesale prices would make an early monetary policy tightening inevitable.
Mr Gokarn hinted RBI was not looking at raising policy rates immediately, saying it would be “premature to take any mid-term policy action.”