RBI board meeting: Deficit move unlikely to drive up inflation, says Shaktikanta Das

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Published: February 16, 2020 2:30:57 AM

The Reserve Bank board has recommended aligning the central bank's accounting year, beginning July, with the government’s financial year, from April 1 till March 31, from 2020-21.

RBI Governor Shaktikanta Das. (IE)

Reserve Bank of India (RBI) governor Shaktikanta Das on Saturday sought to allay fears of the Budget proposal on fiscal slippage causing a spike in inflationary pressure, saying the government had largely remained within the deficit roadmap set by the FRBM Act. Das also asserted that credit offtake was gathering pace and the transmission of the cut in the benchmark lending rate had improved by 20 basis points since the December 2019 monetary policy review to 69 basis points.

Invoking an escape clause, the Budget for FY21 proposed to inflate fiscal deficit by 50 basis points for this financial year and the next to 3.8% and 3.5% of GDP, respectively, amid a sharp cut in the corporate tax rate and a shortfall in revenue mop-up following a broader economic slowdown. Speaking to reporters, alongside finance minister Nirmala Sitharaman, after a meeting of the RBI board in the capital, Das said: “The direct inflationary impact of any budget is the fiscal deficit number (when borrowing goes up), but the government has adhered to the principle of fiscal prudence. The good part of government borrowing is also budgeted to come from small savings.”  “Therefore, I don’t see much of an inflationary impact,” Das said.

Retail inflation scaled a near six-year high of 7.59% in January. Wholesale prices-based inflation, too, jumped to a 10-month high of 3.10% in January. The governor also stressed that moderating crude oil prices will have positive impact on inflation. As such, the current spike in retail inflation is primarily driven by food articles, mainly protein-based items, and core inflation has edged up slightly because of the revision of telecom tariffs, he said. This is why the monetary policy committee, in its review meeting earlier this month, decided to keep the repo rate unchanged but still delivered implicit easing, to address concerns about a protracted growth slowdown.

The RBI said it would lend Rs 1 lakh crore of one-year and three-year money to banks at the repo rate 5.15% so they would have durable funds at a softer rate. It also gave them a six-month CRR-break on new home, auto and MSME loans. Economic growth is expected to hit a seven-year low of 5.7% in FY20 and the Economic Survey expects growth to pick up to 6-6.5% in the next fiscal. Asked about the review of the monetary policy framework, Das said, “Internally we are analysing how MPC framework has worked over the last three and a half years. At the appropriate time, if required, we will have discussions with the government. At the moment, it is under review within the RBI.”

Commenting on slowdown in credit growth in recent months, Das said there were signs of an uptick and the momentum would only be rising. “If you look at bank credit to the commercial sector, it was actually negative at the end of September by about Rs 1.3 lakh crore or so. At the end of January, it was plus Rs 2.7 lakh crore,” he said. Overall non-food credit growth has remained subdued in recent months, having hit 7.1% y-o-y as of January 31, against 14.7% a year before. “Credit flow is slowly and steadily reviving and thanks to the various measures announced in the Budget and in the run-up to the budget by the government, and the measures announced by the RBI, we do hope the credit flow to improve in the coming months,” Das said. The Reserve Bank board has recommended aligning the central bank’s accounting year, beginning July, with the government’s financial year, from April 1 till March 31, from 2020-21.

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