Governor Bimal Jalan discussed the issue with finance minister Yashwant Sinha on Thursday. Deputy governor YV Reddy was also believed to be present at the meeting. Jalan may have a second round of meeting with Sinha on Saturday.

According to sources in the North Block, the RBI has advised the government to tap the non-bank entities for raising money to fund the overshooting of the fiscal deficit which may be necessary as the customs and excise collections in fiscal 1999 are set to be much below the target.

Sources claimed that the government last week placed a long-dated paper with General Insurance Corporation to raise about Rs 2,000 crore. However, it could not be confirmed. Ninety per cent of the 12.60 per cent 20-year tap stock-- which mopped up Rs 1131.88 in the last weekof November -- was picked up by the Life Insurance Corporation.

"That was a test case. The Reserve Bank wants the government to raise funds from the non-bank entities to avoid the strain on the banking sector," sources said.

The government overshot the gross borrowing target on Thursday after it placed a Rs 2,000 crore ten-year stock with the RBI announced the auction of a fresh three-year paper to mop up Rs 1500 crore on Monday. The gross borrowing has now peaked at Rs 80,452 crore as compared to the budgeted borrowing programme of Rs 79,376 crore.

Both inflation and the money supply growth have become a political issue against the backdrop of the Bharartiya Janata Party's debacle in the recent assembly elections in three states. Former RBI governor C Rangarajan and former deputy governor SS Tarapore have severely criticised the RBI for the money supply growth.

Jalan has reportedly impressed upon Sinha that the banking sector cannot bear the burden of the government borrowing in the context of moneysupply growth. As on November 6, the year-on-year growth in money supply was pegged at 18.4 per cent-- way above the RBI targeted M3 growth of 15.5-16 per cent. The net bank credit to the government at Rs 47,002 crore accounts for 52 per cent of the M3 growth. In the corresponding period of the previous fiscal, the net bank credit to the government at Rs 31,278 crore accounted for 43.4 per cent of the M3 growth.

"The RBI has made it clear that it cannot support the government borrowing programme exceeding the budgeted level as it will put tremendous pressure on interest rates. Despite the easy liquidity scenario, the impact is bound to be felt as non-food credit has started picking up," sources said. Between August 28 and the first week of November, non-food credit has growth by Rs 14,130 crore.

Analysts feel that primary reasons for the government to go on a borrowing spree is its failure to control expenditures. "Most of the borrowings are because the of ways and means advances trigger which suggeststhat there are cash management problems and expenditure like salaries and wages are still not curbed," an analyst in a leading brokerage said. The limit under WMA for the second half of fiscal 1999 is pegged at Rs 7000 crore. The government is required to borrow from the market once it crosses 75 per cent of the WMA limit.

In the October credit policy, Jalan had said that the market would not be able to absorb such a high borrowing programme from the government and interest rates are bound to be impacted in the longer run.

Sources said that the overall macro economic picture had turned quite gloomy with trade deficit between April and October going up to $ 5.8 billion as compared to $ 2.7 billion in the corresponding period in the previous year. There is no signs of ondustrial recovery and aggicultural production in down.