{LONGTERMINVESTORS} Rajan Says Modi Missing Fiscal Goal May Propel India Yields

 

Rajan Says Modi Missing Fiscal Goal May Propel India Yields (1)
2016-01-30 07:25:37.187 GMT


By Kartik Goyal and Unni Krishnan
     (Bloomberg) -- Indian sovereign debt could lose favor among
investors if Prime Minister Narendra Modi's government misses
its fiscal deficit targets, central bank Governor Raghuram Rajan
said before a monetary-policy meeting next week.
     "Deviating from the fiscal consolidation path could push up
government bond yields, both because of the greater volume of
bonds to be financed and because of the potential loss of
government credibility on future consolidation," Rajan said in a
lecture in New Delhi Friday. "Unfortunately, the growth
multipliers on government spending at this juncture are likely
to be much smaller, so more spending will probably hurt debt
dynamics."
     The benchmark 10-year yield has climbed amid concern a
proposal to increase the salaries of millions of Indian civil
servants risks derailing the government's budget-deficit goal.
The pay increases also threaten to fuel inflation, limiting room
for Rajan to add to last year's four interest-rate cuts.
     Rajan said low and steady consumer-price inflation will
help to bring interest rates lower.
     Citing Brazil's example, Rajan said the "enormous costs of
becoming an unstable country far outweigh any small growth
benefits that can be obtained through aggressive policies."
     "We should be very careful about jeopardizing our single
most important strength during this period of global turmoil:
macroeconomic stability," he said.

                         Deficit Target

     The government aims to reduce the deficit to 3 percent of
gross domestic product in the year ending March 2018. It targets
a shortfall of 3.9 percent by March 2016 and 3.5 percent the
following year.
     The 2.4 percent slump in the rupee and the threat of
government deviating from fiscal consolidation will probably
keep Rajan on hold at the Feb. 2 monetary-policy review. Thirty-
six of 38 economists in a Bloomberg survey predict the central
bank will leave the benchmark repurchase rate at 6.75 percent,
while two see a cut to 6.5 percent.
     The benchmark 10-year yield rose to 7.81 percent on
Thursday, near the five-month high reached in December,
according to prices from the Reserve Bank of India's trading
system.

                        Stressed Assets

     India's consolidated fiscal deficit of the central and
provincial governments widened to 7.2 percent in 2015 from 7
percent in 2014, and was "by far the largest among countries we
like to compare ourselves with," Rajan said. "Presently Brazil,
a country in difficulty, rivals us on this measure."
     Talking about stressed loans, Rajan said that while a
number of good banks have taken steps to resolve the problem,
some others need to take more proactive measures to address the
issue. The central bank has expanded the tools lenders have to
clean up balance sheets, he said.
     The RBI is also working on identifying currently non-
recognizable capital that is already on bank balance sheets,
such as undervalued assets. The authority could allow some of
these to count as capital, Rajan said.
     "While the profitability of some banks may be impaired in
the short run, the system, once cleaned, will be able to support
economic growth in a sustainable and profitable way," he said.
"To be less proactive, as our past and the history of banking
across the world suggests, will only see the problem get bigger
and less manageable."

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