Heavy government borrowing harms low-interest regime: RBI governor

22 May 2009

The government heavy borrowing plans for the 2009-10 fiscal is a damper on the Reserve Bank's efforts to maintain a low interest rate regime, Reserve Bank of India (RBI) governor Duvvuri Subbarao said today.

The government plans to borrow a record Rs362,000 crore  ($77 billion) in the financial year 2009-10 (1 April- 31 March), as per the government's pre-election interim budget.

"Large borrowing by the government runs against the low interest rates that the Reserve Bank is trying to maintain, to spur investment demand in keeping with the stance of the monetary policy," Subbarao said at a financial management summit.

The governor was speaking on `Risk Management in the Midst of the Global Financial Crisis', at a financial management summit organised by the Economic Times.
 
''On the monetary policy front, managing the risk calls for maintaining ample liquidity in the system. The RBI has done so the past six months through a variety of instruments and facilities.  And in the April 2009 policy review, we extended the tenure of many of these facilities. Some will argue, and rightly so, that this might be sowing the seeds of the next inflationary cycle. And this is exactly the kind of risk one has to grapple with. So while the Reserve Bank will continue to support liquidity in the economy, it will have to ensure that as economic growth gathers momentum, the excess liquidity is rolled back in an orderly manner,'' he said.

While the monetary easing has increased liquidity considerably, at the aggregate level this has not been out of line with our monetary aggregates unlike in many advanced countries and as such, the challenge of unwinding will be less daunting for India than for other countries, he added.

''The adjustment in market interest rates in response to changes in policy rates gets reflected with some lag. In India monetary transmission has had a differential impact across different segments of the financial market. While the transmission has been faster in the money and bond markets, it has been relatively muted in the credit market on account of several structural rigidities,'' he pointed out.