Reserve Bank of India governor Raghuram Rajan on Wednesday brought down its key policy rate by 25 basis points citing that the fiscal consolidation was better than what numbers show and that the combined fiscal deficit is much lower due to the government transferring more funds to the states.
"The true quantum of fiscal consolidation may be higher than in the headline numbers. Also, the government is transferring a significantly larger amount to the states, without entirely devolving responsibility for funding central programmes. To the extent that state budget deficits narrow, the general fiscal deficit will be lower," Rajan said in a statement on Wednesday.
It has been decided to reduce the policy repo rate under the liquidity adjustment facility by 25 basis points from 7.75% to 7.5% with immediate effect," The move comes less than a week after the Union Budget where finance minister Arun Jaitley announced the signing of a monetary policy framework where RBI has been given a flexible inflation target of 4% in the medium term. The government also said that it will amend the RBI act to set up a monetary policy committee which will henceforth decide on policy rate.
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