Government borrowing can squeeze corporate sector: Viral Acharya

Mumbai/Bengaluru: An increase in government borrowing runs the risk of flooding the debt market, and puts upward pressure on interest rates, making it more expensive for companies to borrow, said outgoing Reserve Bank of India Deputy Governor Viral Acharya.

In a lecture published on the Federal Bank website late on Monday, Acharya said India's borrowing relative to its output has ranged from 67 per cent to 85 per cent 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.

The Reserve Bank of India (RBI) cut the repo rate to 5.75 per cent 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.

Acharya is set to leave the central bank on Tuesday, six months before the scheduled end of his term in office. Acharya, who is a Professor with the New York University's Stern School of Business, cited personal reasons for the departure.

India should cut back on subsidies and programs that are not delivering long-term growth and divest more of its public sector holdings, Acharya said.

"The much-needed land, labour and agricultural reforms could be undertaken, all of which can help crowd-in private sector growth," Acharya said.

There could be efficiency gains if there are more private investors playing an effective role in the governance of public sector enterprises, he added.

RBI rejigs Deputy Governor portfolios

With the exit of Viral Acharya, Deputy Governor  of the Reserve Bank of India (RBI), the central bank on Tuesday announced reshuffling of portfolios amongst the three deputy governors effect from July 24.

Acharya, who resigned from the post of deputy governor six months before his term was scheduled to end, oversaw key portfolios including the Monetary Policy Department, Financial Stability Unit and Financial Markets Regulation.

The Monetary Policy Department will now be under BP Kanungo, while Financial Stability Unit has been given to MK Jain. NS Vishwanathan will oversee the Financial Markets Operations and Financial Markets Regulation Depar-tments.