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The Reserve Bank of India (RBI) Friday said the Centre and states should stick to the fiscal deficit target as any slippage will have an adverse bearing on inflation and increase market volatility.
In its fourth bi-monthly monetary policy for the fiscal, the RBI made a strong case for improving domestic macro economic fundamentals to neutralise the impact of global trade tension and rising oil prices.
"...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 RBI said.
The government Thursday announced a Rs 1.5 per litre cut in excise duty which would result in a revenue loss of Rs 105 billion in the current fiscal. There are apprehensions that this may have a bearing on the Centre's fiscal deficit target of 3.3 per cent. Similarly, certain states too have cut VAT on the domestic fuel.
Finance Minister Arun Jaitley has, however, assured that the government will stick to the fiscal deficit target and there will not be any slippages.
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The RBI projected retail inflation to be between 3.9-4.5 per cent in October-March of the current fiscal.
It said the inflation outlook calls for a close vigil over the next few months because several upside risks persist.
"The MPC notes that global headwinds in the form of escalating trade tensions, volatile and rising oil prices, and tightening of global financial conditions pose substantial risks to the growth and inflation outlook. It is, therefore, imperative to further strengthen domestic macroeconomic fundamentals," the apex bank said.
Prices of bent crude crossed $86 a barrel -- the highest in 4 years. India, which imports 80 per cent of its crude oil requirements, has been impacted by the crude price rise with petrol and diesel prices touching record high levels.
Oil prices remain vulnerable to further upside pressures, especially if the response of oil-producing nations to supply disruptions from geopolitical tensions is not adequate.
The recent excise duty cuts on petrol and diesel will moderate retail inflation.
