RBI governor Sanjay Malhotra has dismissed the concern in the markets about managing liquidity after the government said it would borrow a record Rs 17.2 trillion next fiscal, which is Rs 2.5 trillion more than it had borrowed in FY26. He said the net borrowing is only Rs 20,000 crore more than this year’s level and that given the 10% nominal growth target and the massive jump in the budget size to Rs 55.5 trillion, this is quite manageable.
Putting fiscal consolidation onto a slow lane, targeting only a 10 bps reduction from the current year to 4.3% of GDP, finance minister Nirmala Sitharaman has pushed for more borrowings at Rs 17.2 trillion as she has increased the capex to Rs 12.21 trillion for the next fiscal. The budget has also presented an optimistic outlook on nominal GDP growth of 10%, up from 8% in FY26.
There will be a higher borrowing to the tune of Rs 2.5 trillion over FY27 to Rs 17.2 trillion in gross borrowing and Rs 11.7 trillion in net borrowing as Rs 5.5 trillion worth of government bonds are due for redemption next fiscal. In FY26, the government’s gross market borrowing was Rs 14.8 trillion and net borrowing was Rs 12.5 trillion.
The size of the budget has also ballooned accordingly to Rs 53.5 trillion in the next fiscal, up from Rs 50.65 trillion in the outgoing fiscal.
“To finance the fiscal deficit of 4.3% of GDP, the net market borrowings from dated securities are estimated at Rs 11.7 trillion. The balance financing is expected to come from small savings and other sources. The gross market borrowings are estimated at Rs 17.2 trillion,” she said in the budget speech this Sunday. This means the government will borrow Rs 2.5 trillion more than in the last fiscal.
Dismissing concerns about gross higher market borrowing of Rs 17.2 trillion, the governor said, “A better way to look at the government borrowing is the net borrowing, which is just about Rs 20,000 crore more than the current fiscal. With 10% nominal GDP growth and a larger budget size of Rs 53.6 trillion, which is up 8% over the current fiscal, managing additional Rs 20,000 crore in net borrowing is not at a pr0blem because in the current fiscal the net borrowing is Rs 11.53 trillion which will be Rs 11.73 trillion."
He said, “The gross borrowing of Rs 17.2 trillion of course looks higher but you also have to look at the higher redemption to the tune of over Rs 5.5 trillion coming up through the course of next fiscal. But net borrowing is what one should be really looking at to determine the real liquidity condition in the market.”
Malhotra added, “We will continue to provide ample liquidity as is required to meet the productive needs of the economy. We will also ensure that the monetary policy transmission happens in all markets--not only in the overnight markets, but also in the money markets, the government securities markets, corporate bonds market, credit markets.”
He explained, "So whatever we do with regard to liquidity is keeping this overarching goal in mind. Now you know that we have a number of tools for enhancing liquidity such as the OMOs, long term and short term VRRs, VRRRs, so as to be able to ensure that we give liquidity and we keep the overnight liquidity at the policy level rates. That is the immediate target."
He said, "We can also use the T-bills route to fund the government borrowings and not just selling dated securities, which will help in managing the yield curve better. Also the budgeted numbers for small savings are also, you know, quite conservative."
Deputy governor Swaminathan J chipped in with a historic perspective on rising government borrowing. "Till FY2008, we borrowed Rs 1.9 trillion each year. Two years later, in FY10, we borrowed Rs 5.8 trillion, which was three times the gross-borrowing. Was that managed well? Yes that was managed. Again in FY21, we borrowed about Rs 7 trillion. In two years' time, we borrowed Rs 15 trillions each. So if you compare to that the increase is nothing significant at all. I am certain we will be able to manage government borrowing quite efficiently," he said.