Mumbai, Nov. 5: The government is likely to increase its borrowings by at least another Rs 20,000 crore to paper over a widening fiscal deficit that is now projected at 5.3 per cent of GDP in 2012-13.
Finance minister P. Chidambaram told a wire agency in Mexico City that it would need to borrow more to finance the gap that has widened because of slow revenue collections and the pay out of higher-than-anticipated subsidies on food, fuel and fertilisers.
The prospect of higher borrowings could, however, diminish the possibility of a rate cut early next year.
RBI governor Duvvuri Subbarao had hinted at a “policy easing” to mollify critics for failing to cut rates on October 30 when the central bank undertook the second-quarter review of the monetary policy. The RBI chose to maintain the rate-signalling repo rate at 8 per cent and merely cut the cash reserve ratio (CRR) by 25 basis points to 4.25 per cent.
With inflation expected to remain firm, it is felt that the central bank may not be able to stick to its guidance of bringing down the policy rate in January when it is due to review the monetary policy again.
The bond markets aren’t surprised to hear that the government plans to increase its borrowings.
Harihar Krishnamoorthy, treasurer of FirstRand Bank, said there would be better visibility on this front early next year.
“The markets have been expecting a Rs 20,000-25,000 crore fiscal shortfall,” he said. Much will depend on the revenues that the government is able to generate from 2G spectrum auctions and the public sector divestment programme that has yet to get off the ground. Former finance minister Pranab Mukherjee had budgeted for Rs 30,000 crore to be raised from share sales by PSUs.
Krishnamoorthy expects the government to announce certain expenditure control measures over the coming weeks. He did not rule out another CRR cut as it would inject liquidity into the system and help to bring down the cost of funds.
Rupa Rege Nitsure, chief economist at Bank of Baroda, said she didn’t expect the repo rate to be cut any time soon since inflation isn’t likely to come within the RBI’s comfort zone. “It (inflation) is unlikely to come down till the end of this fiscal year. Therefore, CRR reductions will continue,” she added.