Why Viral warns about risk of high borrowings from debt mart

Bengaluru: An increase in government borrowing can risk flooding the debt market while making it expensive for companies to borrow, outgoing Reserve Bank of India (RBI) Deputy Governor Viral Acharya has said before demitting office.

Taking yet another indirect dig at the Centre, he said India's borrowing relative to its output has ranged from 67% to 85% since 2000 and has outpaced many emerging markets including China.

"As more government debt floods markets, the relative safety and liquidity premium attached by investors to high-rated corporate bonds diminishes, raising the cost of borrowing especially for AAA-rated borrowers and making it relatively less sensitive to policy rate cuts," Acharya said. Acharya has left RBI , six months before the scheduled end of his term in office, citing personal reasons.

The RBI cut the repo rate to 5.75% on June 6, its third cut in 2019, while also changing its policy stance to "accommodative", after data showed the economy growing at its slowest in over four years. India should cut back on subsidies and programmes that are not delivering long-term growth and divest more of its public sector holdings.

The much-needed land, labour and agricultural reforms could be undertaken, all of which can help in crowd-in private sector growth. There could be efficiency gains if there are more private investors playing an effective role in the governance of public sector enterprises," Acharya said.

Toward the end of his tenure, Acharya was at the receiving end of the government's ire. That came after he delivered a hard-hitting speech on October 26, wherein he directly criticised the Government for seeking surplus of the RBI.

Urjit Patel, the then Governor, who was seen as encouraging Acharya to speak on central bank autonomy, subsequently resigned and was replaced by Shaktikanta Das, an ex-bureaucrat. The government is preparing its first-ever overseas sovereign bond issue later this fiscal where officials said the main aim is to leave domestic funds for the private sector borrowings and to tap low cost overseas funds.

"Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution," Acharya said.

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