The government is expected to wait till January for announcing its higher borrowing requirement for the financial year, instead of incorporating it in the second half loan calendar to be issued later in September.
While the markets expect the government to overshoot the borrowing target this year, the decision might send a wrong signal at a time when the economy is facing issues such as a high fiscal deficit and sticky inflation.
The Reserve Bank of India [ Get Quote ] (RBI) and the government will put out a borrowing calendar for the second half of the current financial year in the last week of September. The calendar could well be within the budgeted targets, so as to avoid any nasty surprises to the market as of now.
"The government's borrowing will definitely overshoot in the second half. Some of the oil companies are saying they are losing Rs 6 per litre in their petrol sales. The government is yet to rationalise energy prices," said Rupe Rege, chief economist at Bank of Baroda [ Get Quote ].
Data released recently showed India's fiscal deficit for the first quarter of current financial year had reached Rs 2.64 lakh crore, more than half the full year target.
The budget aims to contain the deficit to 5.1 per cent of gross domestic product this financial year. Rege added the ballooning burden of fuel and food subsidies in the current year implied the government would not be able to meet its fiscal targets.
The government had planned to front-load this year's borrowing by raising 65 per cent or Rs 3.7 lakh crore in the first half itself. It has room to borrow about Rs 2 lakh crore in the second half if it wants to stick to the budgeted commitment of Rs 5.7 lakh crore of gross borrowing. Last financial year, it had borrowed Rs 2.6 lakh crore in the October-March period.
Typically, government borrowing ends in February each financial year. However, the borrowing auctions had spilled over to the last month of the financial year 2011-12. Also, the government took recourse to Ways and Means Advances and borrowed Rs 73,000 crore (Rs 730 billion) via cash management bills last year.
"There could be some short-term borrowing this year, too, but I do not see it coming in the third quarter," said the head of treasury from a large public sector bank.
Also, RBI has made it clear the government needs to get a grip on its expenditure to reduce the deficits.
"Failure to narrow the twin deficits with appropriate policy action threatens both macroeconomic stability and growth sustainability," it had said in the first quarter monetary policy review.
For the central bank, the government's decision to go for higher than budgeted borrowing will mean more open market operations.
Last year, RBI had to resort to OMOs only in the second half; this year, it has already infused over Rs 80,000 crore (Rs 800 billion) via bond purchases.
"At this juncture, both RBI and the government cannot afford to send yields shooting like last year," said the treasury head of a private bank. The yields on government bonds had shot to nine per cent on the announcement of the second half borrowing plan. Bond yields have largely remained in the 8-8.25 per cent range this year, with help from OMOs.