Govt’s fiscal reform moves aided rate cut decision: Rajan

  • HT Correspondent, Hindustan Times, New Delhi
  • Updated: Mar 04, 2015 23:43 IST

The Reserve Bank of India justified its move to reduce the repo rate by 25 basis points to 7.5% on grounds of increased satisfaction with the government’s measures to maintain fiscal consolidation. Repo is the rate at which banks borrow from RBI.

Speaking at a hastily-convened telephonic concall with researchers and analysts even as the market was riding on the enthusiasm fuelled by lower rates, RBI governor Raghuram Rajan said the main overriding reason was the intent of the government to improve the fiscal situation as mentioned in the budget.

“There are a number of expressed intents from the government to clean up the legacy issues of the past,” Rajan said in response to a question on why the central bank chose to reduce rates suddenly. “The intents could result in a higher quality of fiscal consolidation.”

On January 15, when the central bank similarly surprised markets with a reduction in the repo rate by 25 basis points to 7.75%, the RBI governor had emphasised that once the monetary policy stance shifts, subsequent policy actions will be consistent with the stance. Elaborating, he had said that “key to further easing are data that confirm continuing disinflationary pressures. Also critical would be sustained high quality fiscal consolidation as well as steps to overcome supply constraints and assure availability of key inputs such as power, land, minerals and infrastructure.”

Reiterating these data points on Wednesday, RBI’s stance was that as the government was transferring a significantly larger amount to states, without devolving responsibility for funding central programmes, “to the extent that state budget deficits narrow, the general fiscal deficit will be lower.”

The 14th Finance Commission headed by former RBI governor YV Reddy had recommended an increase in states’ share in Union taxes to 42%. The government accepted the recommendations, a move that will give states an extra Rs 1.78 lakh crore in 2015-16.

Rajan further said: “Supported by lower international energy prices, there is a welcome intent to shift from spending on subsidies to spending on infrastructure, and to better target and further reduce subsidies through direct transfers.”

Crisil Research said while the Budget postponed the 3% fiscal deficit target by a year, “realism in its projections on revenue, measures to improve manufacturing and ease of doing business, shift of focus from subsidies to spending on infrastructure etc are all positive steps that will improve the quality of the fiscal adjustment underway.”

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