Borrowings 'not a huge challenge'

New Delhi: India's central bank doesn't expect managing next year's record government borrowings to be a "huge" challenge, Deputy Governor Subir Gokarn said.

"We have a scenario of Indian growth looking fairly positive and global liquidity still looking fairly comfortable," Gokarn told reporters in Mumbai yesterday.

"So taking all these factors into consideration, we don't expect the borrowing requirement will be a huge challenge to meet."

Yield

The yield on the benchmark 10-year bond reached a near 17-month high this month. The government's debt sales will rise to Rs4.57 trillion (Dh369 billion) in the fiscal year starting April 1 from a record Rs4.51 trillion in the previous year, Finance Minister Pranab Mukherjee said in the budget on February 26.

"The rise in yields is presumably in itself an outcome of markets now factoring in the overall borrowing requirement," said Gokarn.

"There is presumably some perception of liquidity tightening."

The central bank absorbed Rs392 billion at its reverse repurchase auction today, its lowest level since December 24.

Gokarn said the central bank has to deal with issues such as distribution of debt sales over different maturities so "we don't get too much pressure at some point on the yield curve."

Bond prices may be declining also on expectations of accelerating inflation, Gokarn said. Inflation may accelerate to double digits, stoked by higher food prices, he said, adding prices won't "persist" at that level.

India's inflation quickened to 8.56 per cent in January, the highest in 15 months, from 7.31 per cent in December, the commerce ministry said on February 15.

Reserve Bank of India Governor Duvvuri Subbarao said on March 8 that while bond yields have risen, they still are "reasonable" and he expects inflation to "moderate in weeks and months ahead."

Repurchase

The central bank has kept the key reverse repurchase rate, at which it absorbs cash from banks, at a record low of 3.25 per cent since April.

In January, it raised the proportion of deposits lenders need to keep as cash reserves to 5.75 per cent from 5 per cent.

"Yields have hardened a little bit," Subbarao said. "We'll manage the programme in such a way that yields are within reasonable limits and interest rates don't have a negative impact on the competitiveness of the economy."

The world's fastest-growing major economy after China may expand 8.2 per cent in the 12 months from April 1, compared with an estimated 7.2 per cent this year.