Fiscal Deficit Slippage To Impact Inflation, Increase Market Volatility: RBI

Reserve Bank Governor Urjit Patel on Friday said it was crucial that the fiscal deficit target is maintained as any slippage would impact inflation and crowd out private sector investment apart from increasing market volatility.

"It is important that the fiscal deficit target is maintained and not only for the reasons... but also to mitigate the risk of further crowding out because when the centre and states' borrowing programme is taken together, it is of a large quantum," Patel said after announcing the latest monetary policy review here.

Patel expressed his concerns on fiscal deficit in reply to a query on whether populist measures such as a cut in excise duty on fuel by the government on Thursday will impact the overall financial stability, current account deficit and inflation.

"... Should there be fiscal slippage at the Centre and/or state levels, it will have a bearing on the inflation outlook, besides heightening market volatility and crowding out private sector investment," the central bank said in a statement.

On Thursday, the Centre reduced excise duty on fuel by Rs 1.50 per litre and asked Oil Marketing Companies (OMCs) to reduce their price by one rupee, effectively slashing the price of petrol and diesel by Rs 2.50 per litre. The Cenre also asked states to give a matching relief of Rs 2.50 a litre from their Value Added tax (VAT). 

However, Patel said the Central government recently committed to the fiscal deficit target and moved some of its borrowing from the market to National Small Savings Fund (NSSF) and other small savings instruments. The government also reduced its market borrowings and this may help maintain the deficit target, he said.

"I assume given that these two decisions were taken over only a few days in between that this was possibly internalised when the government made its commitment to the fiscal deficit target and reduced its market borrowings. So far, we have to take that at face value," he said.

On September 28, the Centre reduced its borrowing estimate by Rs 70,000 crore to Rs 2.47 lakh crore in second half of fiscal 2018-19. As against the budgeted borrowing of Rs 6.05 lakh crore this fiscal, it now stands at Rs 5.35 lakh crore.

A week earlier on September 20, the government raised interest rates on small savings schemes by up to 0.4 per cent for the October-December quarter. The move is likely to help government raise higher amount from NSSF compared to its target of Rs 1 lakh crore, which was earlier budgeted at Rs 75,000 crore for this fiscal.

The government plans to reduce fiscal deficit to 3.3 per cent of GDP in 2018-19 from 3.53 per cent a year ago. The fiscal deficit target for 2018-19 is Rs 6.24 lakh crore.
 

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