The government didn’t follow the central bank’s lead this April in needed policy, said Reserve Bank of India (RBI) Governor D Subbarao on Wednesday.
He said the decision to cut policy rates at the annual monetary and credit policy in April was not hasty. “It was necessary to front-load the rate cut and entailed expectation of some action from the government side, which did not happen,” he said, in response to a question on whether the central bank regretted the reduction in policy rates at the start of the financial year. He was addressing analysts and researchers at an interaction on Wednesday.
RBI had cut policy rates by 50 basis points at the annual policy statement on April 17, but had decided to on status quo in the mid-quarter policy review in June and then again in the first-quarter monetary policy review yesterday.
Subbarao said the fiscal burden of subsidies was unsustainable and higher subsidies might fan deficit woes. He said India needed to address the fiscal gap and infrastructure bottlenecks. On the balance of payments, he said by early estimates, the current account deficit could be lower this year.
Announcing the first quarter review on Tuesday, the governor said monetary and fiscal policies have to run in coordination, and monetary policy alone would not deliver the desired macroeconomic stimulus.
“There are certain things that need to be done and we used the phrase ‘multiple obstacles to growth’. As those are resolved, we will adjust the monetary policy stance,” he said.
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The central bank will conduct open market operations (OMOs) only with the objective of managing liquidity and not for managing bond yields for the government, RBI said. Subbarao said the timing and quantum of OMOs would depend on the assessment of liquidity.
“It looks like it is supporting the untenable market borrowing of the government, but the motivation is liquidity,” said deputy governor Subir Gokarn. He added the reduction in Statutory Liquidity Ratio (SLR, the minimum amount banks are mandated to invest in liquid instruments such as government bonds and approved securities) offsets the notion of accommodation of the government’s market borrowing.
On Tuesday, RBI announced a cut in the SLR to 23 per cent, from 24 per cent, of net demand and time liabilities. The move should enable banks to provide credit to productive sectors, it added.