The Reserve Bank of India on Thursday said that the government's borrowing programme for the next fiscal was unlikely to pose a major challenge to it, but risks may emerge if the target exceeded the budgeted level.
"We don't expect the borrowing requirement to be a huge challenge. . . (however) there is risk in the sense that private sector demand and government borrowing requirements may go up than expected. Capital inflows may also be lower than expected. These are among the risks we have to keep a watch on," RBI Deputy Governor, Subir Gokarn, told reporters in Mumbai.
The government has a gross borrowing target of Rs 4.57-trillion in 2010-11 as against Rs 4.51-trillion in the current financial year. Out of this, the net borrowing for FY 11 would be Rs 3.45-trillion.
Gokarn said the country's economic recovery was becoming stable and broad based. This, coupled with comfortable global liquidity conditions, would help the central bank manage the state's borrowing smoothly.
"We do expect credit demand to accelerate because recovery is clearly starting to show some stability and becoming broad-based. We have to match this against the overall growth in deposits, which is one source of funding for borrowing requirements," Gokarn said.
Although the government borrowing was not a major concern, it could pose challenges if its requirement and loan demand fom the private sector overshot the estimates, Gokarn said.
Besides, it was important for the RBI to manage the borrowings within the scheduled time, Gokarn said.
Last year, the central bank had 'cushions' with respect to the Market Stabilisation Scheme and possibility of open-market operations to manage liquidity, which may not be useful tools in the current scenario, Gokarn said.
"We could do open market operation in a situation where the economy was slowing down and inflation was declining. We can not use that channel to create liquidity now," Gokarn said.
He also noted that the banking system has some cushion currently through their holdings in the statutory liquidity ratio (SLR), Gokarn said.
