The proposed increase in the government borrowing and subsequent hike in spending is likely to put some pressure on liquidity in Q4 FY-09, an economic think-tank has forecast.

"The government has sanctioned an additional Rs 1,48,093-crore (Rs 1,480.93 billion) over and above the budget estimate. The last quarter of the current fiscal is expected to see Rs 35,000-crore (Rs 350-billion) of borrowing through dated securities. This projected increase is expected to keep up some pressure on liquidity during the next three months," Centre for Monitoring Indian Economy, said in its latest report.

A substantial expected increase in the Treasury Bill floatation could also contribute to a tightening liquidity situation, the report said.

The acute liquidity crunch witnessed by the Indian banking system seems to have eased off substantially following the swift and strong measures announced by the Reserve Bank of India [Get Quote] on January 2, the report said, adding that, "We fear  that the condition may tighten again in the coming months because of the proposed increase in the Government spending, and therefore, borrowing."

The Reserve Bank, on January 2, announced three major measures aimed at improving the liquidity in the system.

These included a 0.50 per cent cut in cash reserve ratio with effect from January 17, a 1 per cent reduction in the reverse repo rate with immediate effect and a slashing of the repo rate by 1 per cent from 6.5 per cent to 5.5 per cent.

The RBI credited Rs 17,500-crore (Rs 175 billion) to the deposit account of the special deposit scheme that was run by the government during 1975-2000 and used the expropriate investments from provident fund, the report said.

"The provident funds are likely to use the money to invest in government securities. This could reduce the pressure on liqudity that comes from the government borrowing, though to a small extent," CMIE said.

According to the report, advance tax outflow from the banking system into the Government accounts was 22 per cent lower from December 2008 quarter at Rs 42,600-crore (Rs 426 billion).

"Pressure on liquidity with banks will be lower to that extent," it said.