India’s central bank was “comforted” that the government stuck with a road map to narrow the fiscal deficit, Governor Raghuram Rajan told reporters in his first public comments since the budget was unveiled two weeks ago.
The goal to reduce the fiscal gap to 3.5 percent of gross domestic product in the year starting April 1 “is a firm indication of government intent on fiscal consolidation,” Rajan said at a press briefing in New Delhi. The budget drew praise at a central bank board meeting on Saturday for fiscal responsibility, public investment and various reform moves, he said.
“How that feeds into monetary policy you have to wait and see,” Rajan said alongside Finance Minister Arun Jaitley. “On the policy date, or whatever dates we take action, we explain our actions at that point.”
Prime Minister Narendra Modi’s move to stick with previously determined fiscal targets stoked speculation among economists that Rajan would cut India’s policy rate immediately after the budget, similar to last year. Rajan said last month that he’d look at both the budget and inflation before making his next move.
‘Happy’ With MPC
India releases inflation data on Monday, and the next scheduled policy review is on April 5. A Bloomberg survey of 32 economists expects consumer-price inflation to slow to 5.52 percent in February from 5.69 percent a month earlier. Rajan has a target to bring it down to 5 percent by March 2017.
Rajan also praised the composition of a planned monetary policy committee, saying he was “absolutely on board and happy with it.” A bill before India’s parliament proposes a six-member committee, with three members picked by the central bank and three by the government. The governor would break any ties.
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“It is a very reasonable step forward,” Rajan said. “The monetary process will benefit from this structure.”
In a speech later on Saturday, Rajan emphasized the need for India to maintain macroeconomic stability, saying it would be beneficial for a stable rupee. He said the central bank intervenes only to smooth volatility, and called for continued efforts to boost productivity through removing bottlenecks and making it easier to do business.
“The recent central budget emphasized fiscal prudence and adhered to past commitments, even while allocating resources towards capital spending and focusing on structural reforms, especially in agriculture,” Rajan said, according to prepared remarks. “The subsequent fall in government bond yields suggests that market investors were calmed by the government’s overall message.”
(Updates with Rajan’s comments in final two paragraphs.)
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