MUMBAI: The market expects an expansion of the central bank’s bond buying programme in the second quarter of the financial year worth an additional Rs1-1.5 trillion, said Saugata Bhattacharya, chief economist at Axis Bank.

The three-day meeting of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) will conclude on 4 June. The rate-setting panel is likely to hold key policy rates over fears of rising inflation.

“One of the key announcements or indications that we are looking for in the policy announcement is an extension for the G-SAP programme. Markets are expecting another Rs1-1.5 trillion of G-SAP in the second round," Bhattacharya told reporters on Thursday.

In April, the central bank had announced secondary market purchases of Rs1 trillion in sovereign bonds under the government security acquisition programme (G-SAP). Experts now believe that RBI might expand this programme to support the burgeoning borrowing programme.

According to Bhattacharya, while it was feared that the banking sector’s ability to buy government bonds will be significantly reduced thanks to an uptick in credit growth, that revival is yet to firm up. Therefore, lenders will still have more room than was originally anticipated.

“Remember that last year there was a significant support to the government’s borrowing programme from the banks because there was no credit opportunity. Moreover, with RBI’s liquidity infusion, banks had to buy some statutory liquidity ratio (SLR) bonds in search of yields," he added.

However, he believes there will be some slippage in the government borrowing target. “We hope it is not too much beyond from the 6.8?ntre’s deficit target for FY22. Maybe another percentage point or so (higher) but there is no doubt it will require RBI’s support."

On demand recovery, Bhattacharya said it will probably need government spending.

“Even as of late May, cash balances of the Centre with RBI were above Rs2.3-2.5 trillion. So, the question now is why the government is still not spending and if the government needs to spend more, should it carry on with the high capex announced in the Budget or divert some of that in more immediate revenue spending to beef up the MNREGA programme and have more cash products for SMEs," he said.

The resumption of consumption demand, he said, will depend to a large extent on fiscal response as RBI’s monetary policy has more or less run its course, having provided initial support during the intense phase of the lockdown and recovery.

“We hear that the government is waiting for the lockdowns to ease because that is when the true fiscal stimulus has the largest multiplier effect on demand and spending. I hope they spend soon," said Bhattacharya.