RBI pores over budget, worries on fiscal math

Some Reserve Bank of India (RBI) officials are worried that a populist budget could put the onus of driving growth on them but limit their ability to respond through big rate cuts this year.

Finance Minister Arun Jaitley increased spending on farm and social sectors in the 2016-17 fiscal year on Monday in a boost to rural India, where most of the country's 1.3 billion people live.

He curbed capital expenditure growth compared to the previous year, yet stuck to his commitment to reduce the fiscal deficit to 3.5 percent of gross domestic product.

Three policymakers aware of the central bank's deliberations on the budget said they are combing through the numbers to test how Jaitley struck a balance, and question some of the assumptions.

An expected $16.6 billion salary and pensions hike for government employees, for example, is inflationary and hasn't been fully accounted for in the budget, they said.

Also, they said the government's revenue expectation from asset sales appeared optimistic given that these fell nearly two-thirds short of the target in 2015-16.

Additional expenses on salaries and a shortfall in receipts could force the government to cut back on capital expenditure to meet its fiscal deficit target. That would hit growth and increase pressure on the RBI to do more, the officials said. "If private investment doesn't pick up, the burden on monetary policy to boost growth will increase," one of them said. A finance ministry official said the impact of higher salaries on inflation will be marginal.

On Thursday, Junior Finance Minister Jayant Sinha acknowledged that a tight fiscal policy will help in further monetary policy easing.

"If we don't provide that (macroeconomic stability) space to monetary policy by generally running a relatively tighter fiscal policy, we cannot expect monetary policy to loosen up as a result of that," Sinha said at an event.

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Reserve Bank of India to prune NBFCs for effective regulation

The Reserve Bank of India (RBI) is working towards harmonizing regulations for non-banking financial companies (NBFCs) to reduce the number of categories in the sector, its Deputy Governor, R. Gandhi.

“Going forward, we will work towards greater harmonisation of the regulations to bring down the number of categories within the NBFC sector,” Mr. Gandhi said at an event organised by industry body, the Confederation of Indian Industry.

The central bank is aligned to the developmental needs of the economy and therefore will continue to approve of new kinds of NBFCs if the economy requires them, he said. RBI is actively studying the peer-to-peer lending arrangements that are slowly gaining traction, he added.

“We are studying peer-to-peer lending and we will come out with the discussion paper. Already the Securities and Exchange Board of India has come out with the similar kind of paper,” Mr. Gandhi said. The central bank is looking at another category of NBFCs — NBFC account aggregates for which the announcement was made this July, he said. NBFC account aggregates will provide technology-enabled solutions to a person to view at one place the position of financial assets across institutions under different regulators, he said, adding that “guidelines for the same are under preparation”.

He also said RBI, based on demand, is looking at revisiting the norms relating to core investment companies.

The business model of NBFCs is inherently risk-prone because of “weaker underwriting standards, enhanced risk-taking capabilities and increased complexities of their activities,” he said.

Besides these risks, he said, NBFCs are also exposed to key risks emanating from regulatory gaps, arbitrage and contagion effects.

They are also more prone to systemic risks due to concentration of exposure to specific sectors. Total number of NBFCs came down from 51,929 in 1997 to 11,769 in September 2015, while their asset size grew from Rs. 75,913 crore in December 1998 to Rs.16 trillion (Rs.16 lakh crore) in September 2015.

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