Budget should increase tax benefits for small investments: Governor Rajan

Mumbai: A day after keeping interest rates unchanged, RBI Governor Raghuram Rajan today said inflation is still a concern for the central bank and the monetary policy continues being "conventional".

 Budget should increase tax benefits for small investments: Governor Rajan

AFP image

"We still have concerns over inflation. So, given the deflationary environment elsewhere, it is actually easier for us because we are not fighting inflation in an environment where inflation is picking up elsewhere. I think we are still in conventional monetary policy territory," Rajan said during a conference call with analysts.

He was replying to a specific question on how an emerging market central bank formulates its monetary policy, given that many in developed world are adopting liquidity stimulus.

Rajan, who became RBI chief in September 2013, yesterday chose to keep interest rate unchanged for the seventh time, out of 11 monetary policy decisions announced under his regime so far. He also made it clear that he would not like to do a "flip-flop" on the same.

The emergence of satisfactory data -- inflation trending low and household expecting it to cooling -- had resulted into a surprise announcement of a 0.25 percent rate cut on 15 January to stimulate growth.

Data released for December indicated a rise in the headline consumer price inflation to 5 percent from the 4.38 percent in the preceding month. This was still much better as compared to the RBI target of getting it at 6 percent by January 2015.

The RBI Governor today clarified that the mid-policy action was also to assuage the concerns of some people, who were calling RBI as "tardy" in its policy formulating.

"Given that there was in some quarters, a public perception that the RBI was tardy, we wanted to say that we understood the need for action as and when we had information and we were prepared to act even outside policy dates. And it was useful to signal that," Rajan, who held the key rates at the scheduled policy announcement yesterday, said.

After signalling yesterday that the RBI will be keenly watching progress on fiscal consolidation, Rajan gave more details on RBI's expectations from the upcoming budget, saying it is the quality of the measures which is important.

"A movement of spending from mistargeted or poorly targeted subsidies towards more capital investment would be a good move," he said, adding that such a thing will also be good from the inflation management perspective, as supply side will benefit out of capital spending.

For increasing the saving rate, which has dipped to 30 percent, Rajan also advocated for increasing the tax benefit for small investments in financial instruments like PPF, PF, insurance policies etc under Sec 80C.

"Remember the government increased the limits for tax benefit in savings by Rs 50,000 in the last budget. The question is -- is there room for more primarily because the real tax benefit has fallen over time because the limit was at Rs 1 lakh for a long time? May be what we have to do is increase that," Rajan said.

On growth, Rajan clarified that the change in computation will not result in a change in the way RBI looks at the economy and reiterated that it is awaiting the release of the new numbers on 9 February.

"We may be reaching the outskirts of the woods, but we are not out of the woods yet. I do not think any data that suggests that we are out of the woods, we would put too much weight on it," he said.

On real interest rate target of 1.5-2 percent, Rajan said the positive thing from a savings perspective is that we are in the positive territory from an inflation management perspective, but sticking to the target spelt out earlier.

There would be case to expand the target beyond 2 percent once we are in a period of sustained high growth, but given that we are only emerging out from problems, the 1.5 percent to 2 percent band is a fair one, he said.

Deputy Governor Urjit Patel also defended the RBI move to take into account the repo rate, and not the deposit rates, while computing the real rate of interest, saying the rate set by RBI is a universal one which is relevant for the entire country.

Rajan said there has been progress in the RBI's talks with the government on adopting the new monetary policy framework, which will entail adopting a formal inflation target and the central bank working to achieve the same.

When asked if RBI also takes into account the job data as its peers in the developed world do, Rajan said available figures are indeed taken into consideration in policy formulation, but the absence of a strong data series results in no explicit mention of the data in policy documents.

To a question on the rationale behind making foreign portfolio investors' play in corporate bonds to over three years maturity, and at par with the rules for G-secs, Rajan said many investors were subscribing to quasi-sovereign paper which was "vitiating" the RBI's intent of making them stick around longer.

"We would love to have you, (just) stay a little longer," he said, seeking to dispel notions of RBI being against foreign flows.

Deputy Governor HR Khan said the RBI has suggested the government to link inflation indexed bonds (IIB) subscribed by institutional investors with the retail inflation and is awaiting response from the government.

Ways are also being devised to increase the interest of retail investors in IIBs, Khan said, acknowledging that there has been a pause after raising up to Rs 7,000 crore in the instrument from institutional investors and Rs 95 crore from retail investors.

PTI

Find latest and upcoming tech gadgets online on Tech2 Gadgets. Get technology news, gadgets reviews & ratings. Popular gadgets including laptop, tablet and mobile specifications, features, prices, comparison.

Updated Date: Feb 21, 2015 14:23:05 IST