India rates tied to fiscal discipline, Rajan signals Modi

Feb 03, 2016 (LBO) – India held interest rates unchanged on Tuesday with Reserve Bank of India Governor Raghuram Rajan sending a message to Prime Minister Narendra Modi that continued fiscal discipline was necessary for further interest rate cuts.

“The Indian economy is currently being viewed as a beacon of stability because of the steady disinflation, a modest current account deficit and commitment to fiscal rectitude,” an RBI statement said.

“This needs to be maintained so that the foundations of stable and sustainable growth are strengthened.”

The RBI kept interest rates unchanged for a second straight month ahead of a February 29 budget noting a contraction in exports and possible slowdown in remittances from the Gulf region.

“The more that spending is high quality and limited, the more room that it builds up for monetary policy,” Rajan said at a press conference.

The Reserve Bank said it continues to be accommodative even as it leaves the policy rate unchanged, while awaiting further data on the development of inflation.

“Structural reforms in the forthcoming Union Budget that boost growth while controlling spending will create more space for monetary policy to support growth, while also ensuring that inflation remains on the projected path of 5 per cent by the end of 2016-17,” the statement said.

“In keeping with the Government’s Start-up India initiative, the Reserve Bank will take steps to ease doing business and contribute to an ecosystem that is conducive for growth of start-ups.”

These measures will create an enabling framework for receiving foreign venture capital, differing contractual structures embedded in investment instruments, deferring receipt of considerations for transfer of ownership, facilities for escrow arrangements and simplification of documentation and reporting procedures, the RBI said.