The Technical Advisory Committee (TAC) on Monetary Policy of the Reserve Bank of India on Friday expressed serious concerns over the evolving fiscal situation in the country and pointed out that the fiscal pressure would likely to continue beyond 2011-12.
“The fiscal deficit target in 2011-12 was likely to slip significantly,” noted in the minutes of the committee, which was held in the run up to the Third Quarter Review of the Monetary Policy 2011-12 on January 24. In this policy, the RBI had reduced the Cash Reserve Ratio (CRR) by 50 basis points from 6 per cent to 5.5 per cent, which augmented a liquidity of Rs.32,000 crore in the financial system while keeping the policy rates unchanged.
The minutes of the meeting was released on Friday.
Some members felt that the fiscal pressure would continue beyond 2011-12 “as the monetary impact of entitlements such as the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA), oil, fertilizer and food subsidies would be significant.” Some members also felt that unless there was a clear signal of credible fiscal consolidation, the RBI should hold back the policy rate reversal.
Most members felt that inflation would continue at the current levels in the near future because of the structural issues such as fiscal slippage, suppressed elements of inflation, increase in input prices due to the weakening rupee, high inflation expectations and the wage-price spiral.
Some members felt that level of inflation expectations was high and the RBI should continue to keep monetary policy tight (at the present level). It was necessary to bring down inflation significantly from the present level even if it meant lower growth for the next few years. It would ensure that high growth was achieved in subsequent years.
Discussing the domestic macroeconomic situation, members felt that the economy was clearly slowing down.
Keywords: fiscal slippage