Lower Government Borrowing To Prop Up Growth, Moderate Inflation' Says RBI Governor

Reserve Bank Governor Shaktikanta Das on Monday said lower government borrowings than the market estimates will free more capital for the private sector resulting in easing of inflation and bolstering growth.

"This year’s borrowing is lower than what initially the markets had expected. Lower quantum of borrowing means...it would ensure that much more resources will be available in the banking system to meet the requirements of the private sector," Das said here.

Lower government borrowing is a growth-inducing measure as more credit will be available for the private sector to make their investments, he said.

Besides, he said, "lower quantum will help sort of stabilise inflation, how much stabilise I would not like to quantify. It should help in moderating inflation level."

Finance Minister Nirmala Sitharaman in her interim Budget had proposed to borrow Rs 14.13 lakh crore by issuing dated securities to meet revenue shortfall in the next financial year starting on April 1.

This is lower than last year’s gross borrowing estimate of Rs 15.43 lakh crore, which was the highest ever.

The lower borrowing estimate for 2024-25 is on account of growing tax revenue and the government’s resolve to meet its fiscal consolidation roadmap.

Observing that the quantum of borrowing is very important for monetary policy, Das said, "While making monetary policy it is one of the factors which is taken into consideration. I would say it is growth inducing, and it helps in moderating inflation levels."

On the debt-to-GDP ratio, Das said it has touched a high of 88% during the COVID period and since then it is moderating.

With the government further lowering its fiscal deficit target to 5.1% for the next financial year and 4.5% in the subsequent year, the debt-to-GDP ratio should further come down.

Helped by an improvement in tax buoyancy, the government managed to achieve a fiscal deficit of 5.8% against the budget estimate of 5.9% for the current financial year.

Presenting the interim Budget 2024-25, Finance Minister Nirmala Sitharaman earlier this month refrained from providing any tax relief or announcing other populist measures before general elections due in the next couple of months.

"The Revised Estimate of the fiscal deficit is 5.8% of GDP, improving on the Budget Estimate, notwithstanding moderation in the nominal growth estimates," she had said.

As per the Fiscal Responsibility & Budget Management (FRBM) Act, the government plans to achieve a fiscal deficit of 4.5% in 2025-26.

Das said interest payment of the government rises when inflation is high because the central bank has to tighten its monetary stance and as such bond yield goes up.

Going forward, Das said, when inflation moderates, logically bond yields also come down.

For example, he said, "The 10-year bond yield, I remember in May 2022, when we started this rate hike cycle, was 7.14% or so. Today, the 10-year bond yields again come down to about 7.17 or 7.18% range, but in between the bond yields had gone up to 7.30 and 7.40%."

Borrowing cost of the government should come down as inflation moderates, he said, 10-year bond yields have started softening as also 5-year paper.

A bulk of the government borrowing is through 10-year and 5-year papers.