Reserve Bank of India (RBI) governor Raghuram Rajan said on Friday that the central bank has no intention to depart from the inflation framework that has been agreed with the government.
While delivering the CD Deshmukh lecture, Rajan pointed out deviation from the fiscal consolidation path could push up the government bond yields because of the greater volume of bonds to be financed and of the potential loss of government credibility on future consolidation.
Under the UDAY scheme, states will have to take over 75% of the debt of ailing distribution companies and issue bonds. This is believed to bring in a supply of between Rs 70,000 crore and R1 lakh crore of discom bonds into the system— something that market experts believe will take the spread up.
Rajan pointed out that fall in inflation has been a major contributor to lower bond yields, and is the joint work of the government and the RBI, aided to some extent by the fall in international commodity prices.
“This is no mean achievement given two successive droughts that would have, in the past, pushed inflation into double digits. Despite this success, we hear voices suggesting weakening the fight against inflation,” Rajan said.
The governor reiterated that macroeconomic stability relies immensely on policy credibility, which is the public belief that policy will depart from the charted course only under extreme necessity, and not because of convenience.
“If every time there is any minor difficulty, we change the goal posts, we signal to the markets that we have no staying power,” Rajan said.
To strengthen the point, he quoted James Carville, who said, “I used to think if there was reincarnation, I wanted to come back as the President or the Pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”