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Inflation.9.Thmb.jpg Budget would not cause inflation: Shaktikanta

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SME Times News Bureau | 15 Feb, 2020

RBI Governor Shaktikanta Das on Saturday said he does not see any inflationary impact of the Budget FY21.

"Direct inflationary impact of any budget is the fiscal deficit number, if borrowing goes up. The government has adhered to the principle of fiscal prudence," Das said.

"The deficit numbers for the current year and next year are very much within the parameters of the Fiscal Responsibility and Budget Management (FRBM) committee recommendation. A good part of the government borrowings is budgeted to come from small savings. So I don't see much of inflation impact," Das said after the customary Budget briefing meeting by Finance Minister Nirmala Sitharaman.

The Finance Ministry has used the "escape clause" under the FRBM Act by 0.5 percentage point because of poor revenue from taxes. The RBI is internally reviewing the monetary policy framework, which was adopted in 2015 and set an inflation target of 4 per cent, within a tolerance band of +/-2 per cent, for the country's central bank.

The agreement between the government and the RBI in February 2015 had set the inflation target for a period of five years till March 2021. But questions have been raised about efficacy in targeting headline inflation instead of core inflation, which is more reflective of demand conditions in the economy.

The 4 per cent target chosen has been debated. Governor Das, while speaking after a meeting of the central board in New Delhi, said these aspects are being reviewed.

"Internally we are reviewing, analysing how the monetary policy framework has worked over the last three-and-a-half years," Das said, responding to a question whether the RBI should start targeting core inflation when the inflation target comes up for review in March 2021.

The Governor said declining crude oil prices will have a positive impact on inflation. "The main spike is coming from food inflation, that is vegetables and protein items. Core inflation has slightly edged up because of revision of telecom tariffs," he added.

On transmission of rate cuts, he said it is steadily improving and should improve more in the coming months.

"Transmission to fresh rupee loans has increased from 49 bps in December MPC meet to 69 bps in February MPC meet. It's a consequence of rate cuts, surplus liquidity which we have ensured in the system and external benchmarking which was brought into operation from October onwards," he added.

The Governor said credit offtake is picking up. "Because of the measures announced by the government and RBI prior to the Budget and after the Budget, we hope credit flow to improve in the coming days," Das said.

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