RBI ‘s latest headache: Ballooning fiscal deficits of states

TIL Desk/Business/New Delhi-The ballooning fiscal deficits of states have found their way into Reserve Bank of India’s (RBI) policy making thought process. Minutes of the monetary policy committee meeting showed that one of the six members, Ravindra H. Dholakia, expressed concern about the state’s finances.

“State Budgets have been the cause of concern of late because the movement in their fiscal deficits largely determines the variation in the combined fiscal deficit of the country,” the minutes quoted Dholakia.

“States have now started forming a larger proportion of the public expenditures and having a clear idea on their fiscal deficits is important for the monetary policy,” according to Dholakia.

This is how states’ deficit puts monetary policy in jeopardy. When states run large deficits, they have to bridge those by borrowing from the market. As more bonds come in the market, the interest rate gets pushed up, even if RBI wants interest rate to be low.