The Reserve Bank of India governors on Wednesday flagged concerns over fiscal slippage and stress on MSMEs post the implementation of the Goods and Services Tax (GST). While addressing a press conference after the sixth bi-monthly monetary policy meet, Urjit Patel said that the news of fiscal slippage on three levels: this year, next year, and the postponement of medium-term expenditure, alongside rising crude oil prices are the factors deciding the bond yields movements.
“Apart from the direct impact on inflation, fiscal slippage has broader macro-financial implications, notably on economy-wide costs of borrowing which have already started to rise,” the RBI said in its monetary policy statement. On Wednesday, the RBI announced to maintain status quo on repo rate for the third time with a neutral stance on concerns of higher inflation, while raising its forecast between 5.1% and 5.6% in the next nine months.
Besides, a deputy governor also flagged concern over the condition of MSMEs, saying that data suggested that there was some stress on the small and medium-sized enterprises (SMEs) post the implementation of the GST. He said that the GST transition has made it difficult for MSMEs to meet their repayment obligations.
The Central Bank also pointed out six uncertainties that cloud the inflation outlook. First, the RBI said that the staggering impact of the house rent allowance (HRA) may push inflation further up; second, the global uptick in growth will put pressure on crude oil and commodity prices; third, the exact implication of the recently announced hike minimum support price was not ascertained.
The RBI also said that the fiscal slippage, fourth, “could impinge on the inflation outlook”; fifth, hike in customs duty on a number of items may impact inflation as well; and sixth, the confluence of domestic fiscal developments and monetary policy by major advanced economies could undermine the confidence of external investors.
“There is, therefore, need for vigilance around the evolving inflation scenario in the coming months,” the RBI said. The RBI said that the bank recapitalisation and resolution under the IBC should improve credit flows further and create demand for fresh investment.