With the government highly expected to goof up its fiscal deficit targets for the year, its woes are expected to get multiplied due to weakened confidence of investors. Now since the year 2011 is ending with much odds, the work is not over yet, especially for Reserve bank of India. Indian government is considering to borrow anywhere between Rs 30-40,000 crore in the next three months.
A decline in tax collections on account of slowing economic growth, failed measures to raise Rs 40-k crore from disinvestment policy and rise in expenditure on account of a increasing subsidy bill are likely to push the government's fiscal deficit to around 5.5 per cent of gross domestic product (GDP) against the projected level of 4.6 per cent of GDP.
However, the neck does not come out safely with increased borrowings as it would shot up yields in the borrowing markets. The yield moves in opposite direction to prices, so that would mean prices would come down and ultimately it would also dent the bank profits since they are the biggest investors in government bonds. That would call for increased provision requirements from banks' side and hence banks would not be able to come out of 2011 issues in 2012 also.
The lender of last resort, RBI would have an additional responsibility here. The increase in yields can be capped depending on how the Reserve Bank of India (RBI) balances it with open market operations. So that calls for RBI to be start buying bonds proactively and get the borrowing costs back on track.