Will the govt overshoot its borrowing programme?

Will it or won't it - is the Rs 1,170-billion question. With the money and forex markets rocked by volatility over the last 45 days, bankers and dealers have just one question - will the government overshoot its budgeted borrowing programme. The gross borrowings target has been set at Rs 1,177 billion, of which the government has already drawn Rs 631.83 billion.

The Reserve Bank of India, for its part, is confident that the government will stick to the budgeted amount. A senior official in the internal debt management cell at RBI said that the central bank would be able to manage the government's "market borrowing programme without any difficulty" The official RBI stance: "Our own assessment at this stage is that the market borrowing will not overshoot the budgeted amount."

The central bank's optimism however, is not shared by others. According to an analyst at Zurich India Mutual Fund, the government is likely to overshoot the target by Rs 100 billion." The extent to which the government will exceed the budgeted figure will also depend on the magnitude of the fiscal deficit.

Veena Misra, economist at Indira Gandhi Institute of Development and Research (IGIDR) said that though so far "the indications on the fiscal deficit front were positive, the oil pool account could prove to be a snag." According to her, the flattening of the yield curve - with the yields on the long term and short term papers converging - will actually give the government the flexibility to issue papers of a longer maturities.

There is anxiety on another front as well. Can the RBI mop up at least the budgeted borrowing in the next 6 months? The government still has 53 per cent to go before it touches the budgeted Rs 1,170 billion mark.

In the past, the RBI ensured that it completed around 80 per cent of the government's borrowing programme before the onset of the busy season in October, when corporate demand picks up. Dual demand from corporates and government tends to put a pressure on interest rates and results in higher interest rates.

Fiscal 1999-2000, which was characterised by low rates of interest, saw the government borrowing cost stabilise at an weighted average rate of 11.77 per cent, while in 1998-99 the interest cost was 11.86 per cent. This year however, nobody is prepared to hazard any estimates on the actual borrowing costs as interest rates have started to increase only recently. However with another 47 per cent to go, increased rates in the remaining half of the year could impact average interest costs significantly.

One way of offsetting costs is to reduce the tenors of the papers being issued. However with the yield curve flattening, this is unlikely to help reduce costs this time around.

According to the analyst at Zurich, one way of raising funds could be to access the international markets. "The government has, so far, not looked at this method of raising funds," he said , pointing out that it would also help in reducing the costs.

Dealers say that trying to arm-twist banks to subscribe to government securities would be futile. All banks hold securities in excess of the statutory requirement of 25 per cent. In some cases the banks hold paper to the extent of even 40 per cent. Kameswar Rao, chief general manager at Industrial Development Bank of India (IDBI) said that arm twisting banks to invest in more government paper would not be a feasible idea.

In the final analysis however, everything will depend on RBI's dexterity in managing the government's debt.

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