ISAS Briefs

The Reserve Bank of India (RBI) manages the borrowings of the Indian government. In almost all the years since independence, the government has not had a fiscal surplus, and it has had to borrow from the market to meet capital requirements for planned schemes. In fact, the argument among the financial managers of the government was that there was no harm in running up a fiscal deficit if the funds were used for capital expenditure. By the 1980s, the government was borrowing for its current expenditure as well, and the resultant growth of debt threatened to take the country into a financial crisis. The RBI has managed these substantial borrowings from the market. It has managed government borrowing in a manner that the targets are fulfilled, without affecting credit flows to the rest of the economy. The RBI decides on tranches of government borrowing at different times of the year, the periodicity and the coupon rate, and ‘persuades’ the state-owned banks to pick up the bonds, which are then counted as part of their statutory lending ratio. Apart from this, the RBI manages the borrowings of the state governments as well, taking into account their needs and their capacities. In fact, the RBI has been the debt and treasury manager of the government.