The Reserve Bank of India (RBI) on Friday hoped the Centre would stick to its fiscal deficit target of 3.3% despite this being an election year.
Any slippage in fiscal deficit goal would have an adverse bearing on price rise and would also 'crowd out' private investment, RBI Governor Urjit Patel said.
"Should there be fiscal slippage at the Centre and/or state levels, it will have a bearing on the inflation outlook, besides heightening market volatility and crowding out private sector investment," he said in a post-policy press briefing.
Crowding out is a reduction in private investment that occurs due to an increase in government borrowing.
Recently, the government had announced to move Rs 70,000 crore worth of its borrowings from the market to small savings to mitigate the risk of crowding out.
Patel hailed the move but to a pointed question on whether the fiscal deficit is at the risk of being breached in an election year, he said, “We have taken it (Centre's commitment) at face value”.
Finance Minister Arun Jaitley has time and again assured the investors and the market that the government would stick to the fiscal deficit target and capital spending would be done as planned.
But, the Centre's move to cut petrol and diesel prices by Rs 2.50 per litre on Thursday is expected to have an adverse bearing on the fiscal deficit target as the move would result into a revenue loss of Rs 10,500 crore to the exchequer.
