Silent on possible easing of monetary policy in the next review in April, Reserve Bank of India governor Raghuram Rajan on Saturday said the government’s decision to stick to its fiscal deficit target was comforting. Finance minister Arun Jaitley committed to fiscal discipline in the Budget 2016-17, lowering the deficit target further to 3.5% of gross domestic product for next fiscal from 3.9% in the current fiscal, surprising many investors and analysts.
“The headline number of 3.5% fiscal deficit target is a firm indication of government’s intent to fiscal consolidation. Both the markets and RBI are comforted by that. How that feeds into monetary policy, you have to wait and watch,” said Rajan, addressing the media along with the FM after a customary post-Budget meeting with the central board of the RBI. Jaitley informed the board that the key factors of the Budget were maintaining rural focus with an emphasis on asset creation; stepping up of capital expenditure on railways, rural roads, national highways; duty modifications to help manufacturing; and continuing with reforms agenda.
On the budget proposal of appointing an expert panel to review the FRBM Act, under which the Centre has to bring down fiscal deficit to 3% by 2017-18, Rajan said there are many countries that have cyclically adjusted fiscal deficit as opposed to a fiscal deficit target. Rajan said the country was broadly moving in the direction of boosting growth.
“There’s volatility in the recovery process, it’s not a strong sustainable recovery where the signals are exactly in the same direction. The IIP numbers were certainly disappointing,” he said.
On the issue of high level of non-performing assets in the banking sector, Rajan said, “We don’t want to indulge in a broad fishing expedition, which then becomes a reason for banks to get worried about making loans, which will hamper recovery and investments to be made in infrastructure. So, as a country and as a system, we have to draw that balance very carefully,” Rajan said.
However, Rajan said the capital infusion by the government and measures taken by the RBI to boost capital could be adequate. Supporting the government on consolidation, Rajan said there was rationale for merging some PSBs, which are following similar business strategy. Rajan also said he was onboard on the proposed monetary policy committee that would set interest rates in future.