Need to monetise deficit with RBI subscribing to primary issue of G-Secs: SBI Report

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At a time when market appetite is low due to COVID-19 pandemic, there is need to monetise deficit with the Reserve Bank subscribing to the primary issues of dated central government securities, a report has suggested. The Union government plans to borrow Rs 4.88 lakh crore, 62.6 percent of its total borrowing, during the first half of the current fiscal.

Ways and Means Advance (WMA) Limit (ceiling on its temporary loan facility with RBI) has been raised to Rs 1.2 lakh crore from Rs 75,000 crore, (60 percent increase) for the Centre.

According to the SBI research report- Ecowrap, states require more support from the Centre as their finances are significantly stressed given that they are the last mile of COVID19 deliveries and also because the possibility of large slippage in Central Government finances is now a reality.

Coming to borrowing in the first quarter of FY21, considering the long-term borrowing demand of Rs 80,000 crore from insurance companies, the borrowing amount of Rs 2.35 lakh crore would only be slightly higher than the redemption value Rs 1.38 lakh crore and is nearly matched till the third week of May, it said.

Furthermore, it said the short term money market rates have declined with call money rate at 4.29 percent and Collateralized Borrowing and Lending Obligation (CBLO) rate at 0.55 percent at end-March 2020.

Hence, the 10-year yield is likely to move down to 5.5-5.75 percent range, with the spread over repo rate around 120-135 bps.

The report pointed out that it will start ratcheting up once the picture becomes clear and the government knows how much fiscal expansion will happen post COVID-19.

"However, we believe in the current scenario when market appetite is already low it seems difficult how such a huge amount of borrowing will be raised. Thus, it is imperative that the Government may use the clause given in FRBM act and monetize its deficit with RBI subscribing to the primary issues of the Central Government Securities and fulfill the supply-demand gap in FY21," it said.

In FY2020, total borrowing by the Centre and States was at Rs 13.5 lakh crore (Centre at Rs 7.1 lakh crore and States at Rs 6.4 lakh crore).

"Given at least estimated 4 percent slippage in GDP or Rs 8 lakh crore, we expect the Centre and States could borrow conservatively close to Rs 20 lakh crore in FY21," it said.

Thus it is a must that RBI monetizes the deficit, using the national calamity clause given the stressed market absorption capacity, it said, adding, this number must be anywhere between 2.5-3 percent of GDP and shown separately as an off balance sheet item in budget like a “COVID BOND”.

This will give a good signal to the market that the country has to resort to unprecedented move in these difficult times, but that will be temporary, it added.

"There exists a misplaced concern in policy circles that monetisation of the fiscal deficit is bound to be inflationary per se. However, with the economy facing demand destruction, it is foolhardy to believe such now," it said.