Fiscal situation alone won't determine RBI's stance

VIEW FROM MINT ROAD: High crude oil prices pose risk to inflation

The Reserve Bank of India (RBI) said fiscal consolidation alone would not decide the stance of the monetary policy, but other factors like rising oil prices would influence the policy. RBI deputy governor Subir Gokarn said the directional change regarding the country’s worsening fiscal situation as presented in the Budget was a positive.

“The directional change is significant in terms of two factors. One that the aggregate reduction in fiscal deficit and second the way in which that reduction is going to be achieved. These give us some reassurance that the process of fiscal consolidation is underway and that is an input to our policy,” Gokarn said.

The finance minister has projected the fiscal deficit at 5.1 per cent of gross domestic product (GDP) for 2012-13, compared to 5.9 per cent in 2011-12 (budgeted 4.6 per cent). The medium-term fiscal policy statement projects the fiscal deficit to decline further to 4.5 per cent in 2013-14 and 3.9 per cent in 2014-15.

H R Khan, RBI deputy governor, said: “The large government borrowing plan will be a challenge. But we have options like OMOs (open market operations), CRR (cash reserve ratio) and LAF (liquidity adjustment facility) to manage the liquidity situation.” He said the liquidity situation was expected to improve in April and would stay close to the bank’ comfort zone.

In its mid-quarter policy statement on Thursday, RBI said credible fiscal consolidation would be a key factor in shaping inflation outlook. RBI is yet to undertake its first reduction in the interest rate in the aftermath of the global financial crisis. In the last three policy reviews, the repo rate was kept unchanged.

Gokarn, too, declined to indicate if a policy reversal would happen soon. “(I) Can’t say what factors will go into policy making in April and what weightage they will carry. But looking at this indicator alone, it is a positive change, that is the aggregate reduction in fiscal deficit and the sources from where it will come are reliable,” he said. “This is not the only factor that will influence the monetary stance. Other factors like high crude oil prices do pose a risk.”