The Reserve Bank of India (RBI) sees a need to cap the total public debt as a proportion of the gross domestic product, considering that excessive government borrowing could hamper the nation's long-term growth, its governor Duvvuri Subbarao said on Wednesday.
"There is an inflexion point beyond which fiscal deficits militate against growth. Government borrowing is not bad per se, but excessive borrowing is," he noted in his inaugural speech at the Second International Research Conference.
Such government-raised funds should be spent on improving human and social capital besides on bettering physical infrastructure.
"If the government borrows and squanders away that money on unproductive current expenditure, it will jeopardise both fiscal sustainability and growth," Subbarao added.
The government had recently revised upwards its borrowing target for the current financial year by about Rs 1 lakh-crore -- to Rs 5.1 lakh crore.
Yields on the government bonds had shot up to close to nine per cent levels following the announcement of the upward revision in the market borrowing programme.
The RBI chief pointed out to the need for conducting open market operations (OMOs),
and said central banks typically have little choice in case of large government borrowing that make the fiscal stance unsustainable.
OMOs, he noted, are motivated by the objective of easing liquidity or reducing the yields on bonds for debt sustainability. "It then becomes a case of acquiescence in fiscal dominance. There is often only a thin line.."
Since November, RBI has bought Rs 70,000 crore (Rs 700 billion) of government bonds via OMOs -- a move that helped in cooling off the yields.
If OMOs are conducted to reduce the government's cost of borrowing, then central banks could end up holding price stability hostage to sovereign debt concerns, Subbarao said.
This week, the central bank will be conducting an OMO to buy government bonds worth Rs 10,000 crore (Rs 100 billion). This is despite a cut in cash reserve ratio by 50 basis points that released Rs 32,000 crore (Rs 320 billion) of liquidity in the system.
Liquidity conditions continue to remain under pressure, as reflected in the repo borrowings by banks and the elevated overnight call money rates.
Today, banks borrowed Rs 1.2 lakh-crore from RBI at the repo rate of 8.5 per cent, whereas the overnight call money rate touched an intraday high of 9.15 per cent.