Reserve Bank Governor Shaktikanta Das on Monday said meeting the fiscal deficit target in FY21 is going to be challenging and the central bank has not yet made a decision on its monetisation. While several economists and former top officials of the Reserve Bank of India (RBI) have suggested the government overshooting its fiscal deficit target due to the COVID-19 pandemic and the resultant lockdown, Das said that going beyond the 3.5 per cent target for fiscal deficit for the current fiscal year becomes “unavoidable”.
“We will deal with it keeping in view the operational realities, the need to preserve the strength of the RBI’s balance sheet, and most importantly, the goal of macroeconomic stability, our primary mandate,” Das said in an interview to Cogencis.
When asked whether the RBI would monetise part of the fiscal deficit through private placement of bonds or issuance of any specific pandemic bonds, Das said, “We have not taken any view on the subject. When the time comes, we will take a judicious and balanced view, keeping in mind the parameters I set out earlier.”
Talking about steps to combat the impact of the pandemic, Das pointed out that it was as important to make plans for exiting the extraordinary measures that are undertaken in response to a situation. “The mantra of coming out of the ‘chakravyuh’ has to also be thought through very carefully and be factored in when entering the ‘chakravyuh’,” he said, citing the hard-to-exit battle formation from the epic Mahabharata.
Das also allayed fears that the central bank would resort to withdrawing accommodation quickly. “To ensure the markets don’t read me differently and think that RBI is going on a tightening mode, let me make it very clear: the exit has to be well-timed, when you are confident that things are working and near normal,” he said.
He said the RBI is ready to take more measures to improve flow of credit to small non-bank financial companies (NBFC) and microfinance institutions (MFIs). The challenge of ensuring flows to mid- and small-sized NBFCs and MFIs is still there, the RBI chief said. “That is an issue that is very much on our table. We will take further measures as necessary to address that challenge.”
The Reserve Bank had fine-tuned the targeted long-term repo operations (TLTRO) and announced ‘TLTRO 2.0’ aimed at directing funds to NBFCs through banks. However, the first TLTRO 2.0 saw demand for just about half of Rs 25,000 crore on offer. The RBI was aware that the demand may not be as good as other repo operations, despite some additional incentives, Das said. “We had a sense that the response may not be as good as TLTRO despite the additional incentives such as exemption from being reckoned as adjusted net bank credit.”
“The auction results convey a telling message, which is that the banks are not willing to take on credit risk in their balance sheets beyond a point. We are reviewing the whole situation and based on that, we would decide on our approach,” he said.
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