India has no plans to increase its fiscal deficit target for this fiscal year but that may change if oil prices rise to USD 130-140 per barrel, a senior finance ministry official with direct knowledge of the matter said on Monday.
The official also said high federal bond yields were a concern, but downplayed the idea that New Delhi could accelerate spending in order to address tight market liquidity.
In February, the government had forecast the fiscal deficit for 2011/12 to be 4.6% of GDP, narrower than 5.1% for the previous year and below many private forecasts.
"Things at this point of time look under control. If oil prices go to USD 130-140 and remain at that level then, of course, it is a different call," the official told Reuters.
The government has been banking on strong growth to help meet its deficit target, but a spike in global oil prices and worries over a slowdown in the economy could upset the fiscal calculations.
Brent crude fell below USD 115 a barrel on Monday as investors weighed a slightly firmer dollar and the prospect of rising demand from the start of the US summer driving season.
New Delhi is likely to revise down its economic growth forecast for the current fiscal year from around 9%, a senior government adviser said last week.
High bond yields a concern
Clouds over India's growth outlook, a potentially widening liquidity deficit and fears of more policy tightening have pushed up federal bond yields to close to 8.5%, a level the official said was "a matter of concern."
"We would like to see yields at last year's average of 7.9%. Of course, it is unrealistic. But there is no justification for this 8.5%," the official said.
"I would expect this 10 year yield to come, depending on market liquidity and growth, (down to) 8.2%, plus/minus 5 basis points or so," the person said.
"In the worst case scenario, it should be 8.25 or 8.3%," the official added.
The yield on the 10-year benchmark bond fell 4 basis points after the comments, to a day's low of 8.42%. It had been steady at 8.46% just ahead of the comments. The benchmark five-year swap rate eased 2 basis points to 8.14% immediately after the comments.
High inflation is expected to force the Reserve Bank of India (RBI) to raise its key interest rate by another 75 basis points in 2011, after it delivered a higher-than-expected 50 bps hike early this month, according to Reuters poll in early May.
Liquidity in the banking system is facing a deficit of an average Rs 60,000-70,000 crore (USD 13.3-15.5 billion), which traders expect will widen to 1 trillion rupees in mid-June when companies make advance tax payments.
The official downplayed the possibility of the government speeding its spending to offset the liquidity deficit.
"When you deliberately try to spend more, the quality of expenditure will suffer ... the government expenditure cannot be speeded up without speeding up the implementation of the projects," the source said.
"The short point is that government expenditures are not governed by market liquidity. They have their own momentum."
The official said the government was still to decide on how to tackle the situation if the yield rises too much, but added reviewing its borrowing could be one of the options.
"We are in discussion with the RBI (Reserve Bank of India) ... if it goes too high ... then perhaps we will have to take call simply just not to borrow or reduce the borrowing size, depending upon our cash flows," the source said.
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