Govt has no plans to monetise deficit: Fin Min

India has no plans to monetise its widening fiscal deficit by selling bonds directly to the Reserve Bank of India (RBI), the finance ministry said on Thursday.

On Monday, the government revised up its gross market borrowing to a record of 4.51 trillion rupees ($93 billion) for 2009/10 (April-March), and the finance secretary said RBI had to support half of the borrowing by buying back bonds through open market operations (OMO).

Analysts say the proposal amounted to monetisation of government debt, a move that could impact the sovereign rating of the country.

"It seems that the Open Market Operations of RBI (Reserve Bank of India) are being confused with monetisation," the finance ministry said in a statement.

"Government clarifies that Open Market Operations of RBI are a regular tool for effective liquidity management."

India's fiscal responsibility law (FRBM Act) allows monetisation of the deficit only in exceptional circumstances, such as a threat to national security or a national calamity.

"At present, notwithstanding the 6.8 percent fiscal deficit projected in budget estimate for 2009/10, the government does not propose to invoke the above provisions of the FRBM Act for facilitating RBI participation in the primary market for government securities," the finance ministry said.

The Reserve Bank has been holding buyback auctions of debt in 2009/10, normally a day ahead of auctions to sell fresh debt.

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In March, the central bank said it would buy back Rs 80000 crores of bonds from the market between April and September to help the market absorb the government's large borrowing needs.

Officials of finance ministry and RBI are to meet on July 17 to finalise the new borrowing calendar to end-September.

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