Till date, the government has borrowed Rs 1,90,000 crore, of which Rs 28,000 crore has been by way of desequestering the MSS (market stabilisation scheme) bonds to the government books. MSS bonds, also called intervention bonds, were floated by the RBI during 2004-07 to mop up excess rupee liquidity caused by the central bank’s intervention in the foreign exchange market. Those were the heady days when foreign investors flooded India with dollars and the RBI stepped in and bought dollars to prevent a sharp rupee appreciation. A strong domestic currency hurts exporters because their foreign earnings result in lesser rupees. The resultant rupee liquidity was mopped up by the RBI by floating MSS bonds.

Even before the scheduled meeting of the finance ministry with the RBI on July 17 to discuss the borrowing strategy for the year, Finance Secretary Ashok Chawla has set the ground rules. He wants the RBI to support the government’s budgeted borrowing programme to the extent of at least 50 per cent by undertaking open market operations (OMOs). In OMOs, the RBI buys back regular government bonds and injects liquidity into the system. The RBI has, so far, conducted OMOs to pump in Rs 28,000 crore against the first half target of Rs 80,000 crore.

Unfortunately, even as the RBI has little choice but to facilitate such a borrowing plan, the government could have done a better job by managing market expectations better. The Budget could have been more transparent on the government’s assumptions when it comes to some key variables that can have a significant impact on its borrowing needs. Two of these variables that impact a huge oil importing country like India’s finances are: global crude oil prices and the exchange rate. While finance ministry officials struggled to put a number to these, they were in for the first shock — a Rs 30,000 crore demand by the petroleum ministry to compensate oil PSUs for potential losses if global crude oil prices continue to hover around $70 a barrel. Higher prices also adversely impact fertiliser subsidy. The fertiliser department may not have approached the finance ministry with any fresh demand, but that is no solace.

... contd.