Rajan for incentivising domestic savings to boost investments

Ahead of the forthcoming Budget, RBI Governor Raghuram Rajan today pitched for incentivisation of domestic savings to boost investments in the country.

"The income tax benefits for an individual to save have been largely fixed in nominal terms till the recent budget, which means the real value of the benefits have eroded. Some budgetary incentives for household savings could help ensure that the country's investment is largely financed from domestic savings," Rajan said.

He was speaking at the Bharat Ram Memorial Seminar in Ficci.

Rajan said the domestic demand has to be financed responsibly and as far as possible through domestic savings.

"Our banking system is undergoing some stress. Our banks have to learn from past mistakes in project evaluation and structuring as they finance the immense needs of the economy," he said.

The RBI chief also said the banks would have to improve their efficiency as they compete with new players such as the recently licensed universal banks as well as the soon-to-be licensed payment banks and small finance banks.

"At the same time, we should not make their task harder by creating impediments in the process of turning around, or recovering stressed assets. The RBI, the government, as well as the courts have considerable work to do here," he added.

On inflation, he said the RBI will have discussions with the government regarding the medium-term inflation band of 2-6%.

"Going forward, we will discuss with the government an appropriate timeline in which the economy should move to the centre of the medium term inflation band of 2-6 per cent," the RBI Governor said.

Further on the monetary side, he said that a central bank focus primarily on keeping inflation low and stable will ensure the best conditions for growth.

"In reacting to developments, however, the central bank has to recognise that emerging markets are not as resilient as industrial economies. So the path of disinflation cannot be as steep as in an industrial economy because an emerging market is more fragile, and people's buffers and safety nets are thinner," he added.

"A 'Volker (former Federal Reserve Chairman Paul Volcker)' like disinflation was never on the cards in India, but an Urjit Patel glide path fits us very well, ensuring moderate growth even while we disinflate," he added.