RBI Governer Raghuram Rajan Warns Government Against Looser Fiscal Policy

30/01/2016 11:43 AM IST | Updated 15/07/2016 8:26 AM IST
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Raghuram Rajan, governor of the Reserve Bank of India (RBI), arrives for a panel session at the World Economic Forum (WEF) in Davos, Switzerland, on Wednesday, Jan. 20, 2016. World leaders, influential executives, bankers and policy makers attend the 46th annual meeting of the World Economic Forum in Davos from Jan. 20 - 23. Photographer: Matthew Lloyd/Bloomberg via Getty Images

NEW DELHI/MUMBAI -- Reserve Bank of India Governor Raghuram Rajan warned on Friday that straying from fiscal consolidation and easing up on the fight against inflation would jeorpardise the country's economic stability at a time of global market turmoil.

The blunt words, in a speech to a research body in New Delhi, come as the government is looking at proposals to widen its budget deficit targets to steer more spending into infrastructure, while government officials have called on the central bank to cut rates further to help boost the economy.

But Rajan said loosening its focus on inflation or the fiscal deficit risked pushing India onto a path similar to Brazil's, saying the South American country passed big stimulus measures and cut interest rates aggressively, but is now suffering from the hangover of those policies.

It would also risk pushing India into a similar situation as 2013 when the country suffered its worst crisis in more than two decades, and dent its appeal at a time when the rest of the so-called BRIC economies are struggling, Rajan added.

"It is at such times that we should not be overambitious," Rajan said.

"We should be very careful about jeopardizing our single most important strength during this period of global turmoil - macroeconomic stability."

Rajan emphasized the need to stick to fiscal consolidation, noting recent power industry reforms passed by Prime Minister Narendra Modi's government could force state governments to absorb 75 percent of the 4.3 trillion rupees held by its utilities, and could inflate the country's debt levels.

New Delhi is believed to be considering widening its fiscal deficit targets when it unveils its annual budget next month, government officials have said. Analysts have said markets will forgive small adjustments as long as the spending is accompanied by other measures such as reducing subsidies.

Rajan also warned about the dangers of changing the current policy of targeting consumer inflation of 2 to 6 percent, which the RBI formally adopted last year.

Recently government officials, including Modi's top economic adviser Arvind Panagariya in an interview with Reuters, have suggested a need to loosen the target.

Rajan rejected those arguments on Friday, warning that changing its target would risk undermining the RBI's "policy credibility."

"If every time there is any minor difficulty, we change the goal posts, we signal to the markets that we have no staying power. Let me therefore reiterate that we have absolutely no intent of departing from the inflation framework," he said.

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