The government's excessive borrowings have resulted in a liquidity shortage in the system- now evident from the banks' average daily borrowings from the RBI's repo window.

The Reserve Bank of India has a challenging task ahead of it as it grapples with tight liquidity in the system, high bank/or bond yields and record government borrowings.

While banks have borrowed every single day since 5 October from the central bank indicating in response to a shortage of funds in the system, Finance Minister Pranab Mukherjee added to the pressure by announcing in the Union Budget a record government borrowing programme of Rs 5.69 lakh crore to finance a fiscal deficit forecast at 5.1 percent of GDP for the financial year ending March 2013. The fiscal deficit is estimated at 5.9 percent of GDP in the previous financial year.

Worse, the government intends to 'front-load' those borrowings -- borrow a huge chunk in the first half of the year (Rs 3.7 lakh crore, or 63 percent) rather than the second -- which will push up the yields on government bonds (heavy supplies of government bonds will require higher rates to attract investors).

According to the indicative calendar issued by the RBI last week, the government plans to borrow an average of Rs 15,000 crore every week in the first half of financial 2012-13. That means it will suck out more than Rs 2,000 crore daily from the economy to fulfill its own borrowing agenda.

These high borrowings between April and September, along with high crude oil prices, leave little room for the central bank to cut rates.

Plus, they (high borrowings) on the part of the government in the previous year are the main reason for the continuing liquidity shortage.While the government borrowed about Rs 2.5 lakh crore until April, it overshot its target in the second half by a whopping Rs 1.11 lakh crore.

And it is these excessive borrowings that have resulted in a liquidity shortage in the system- now evident from the banks' average daily borrowings from the RBI's repo window, which more than doubled to Rs 1.14 lakh crore in the second half of financial year 2011-2012 against Rs 52,000 crore in the first half.

"Since government borrowings are in the nature of Ponzi schemes - in that the government borrows afresh to repay a maturing loan - the annual market loans will have to cover both redemptions and fresh borrowings besides interest on outstanding debt," the Business Standard article argues.

Under the 12th Plan, government debt due for redemption totals Rs 7.81 lakh crore, which means an outflow of funds of about Rs 1.56 lakh crore per year. That figure will peak at Rs 2.31 lakh crore in 2016-17, said an editorial inBusiness Standardtoday.

Plus, slowing foreign investments in India - investments by foreign institutional investors hit a 3-year low in the last financial year - have also piled pressure on the rupee, draining not only the forex reserves but also liquidity in the banking system.