RBI hails fiscal measures, but evasive on rate cuts

The Reserve Bank has welcomed the Budget proposal to bring down fiscal deficit to 5.1 pc, saying the strategy of increasing indirect taxes and capping subsidies are reliable measures to control deficit. It, however, said this will not have any immediate bearing on the central bank's monetary policy stance. "Budget proposals are an important consideration, and positive development, but the monetary stance is not going to be influenced by only one factor", Deputy Governor Subir Gokarn said in Mumbai on Friday. He said the focus on increasing revenue through higher indirect tax mop up and the move to cap subsidies under 2 percent of GDP, are a very reliable way to contain chances of fiscal slippages. "It (fiscal deficit target) is a reasonable reduction in the deficit which is what we wanted to see from our standpoint. Also the fact that it is coming from the revenue side which is more controllable in terms of realisations, which also suggests that the risk of slippages are that much low," Gokarn told reporters at the RBI headquarters. He also welcomed finance minister Pranab Mukherjee's move to cap subsidies under two per cent of GDP next fiscal, saying it will give a fillip to the process of fiscal consolidation. Gokarn, who handles monetary policy at the Mint Road, said exceeding this cap will result in fertiliser, diesel and food prices going up. The monetary policy will take into account the inflationary pressures which would come out through such increases, he added. Gokarn listed the movement of crude prices along with GDP data and other factors like monsoon to be a key determinant of the way the monetary policy will move. He also said pegging GDP growth at 7.6 percent for the next fiscal and average inflation at 6.4 percent are also not "unrealistic." In his Budget speech, Mukherjee pegged Fy 2013 fiscal deficit at 5.1 percent of GDP, lower than the revised figure of 5.9 percent for FY 2012. He also said the government will have to borrow a net of Rs 4.79 lakh crore to bridge this gap. Deputy Governor HR Khan who was also present at the review, admitted the government borrowing programme is a "challenge" and said RBI will meet the finance ministry officials before 31st March to draw up the borrowing calendar for the next fiscal. Khan further said other announcements like opening the corporate bond market to qualified investors and relaxations on the external commercial borrowings front for aviation and power sectors will reduce pressure on the external sector. On the tight liquidity in the system, Gokarn said it would ease from the first week of April onwards.