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The Reserve Bank of India recognised the government's effort to bring down the fiscal deficit in the next financial year starting in April, but did not commit on the timing of an interest rate cut saying it hinges mainly on global oil prices and domestic growth.
"The monetary stance is not going to be influenced by only one factor (lower fiscal deficit)," said RBI's deputy governor Subir Gokarn on Friday in a post-budget media interaction.
"There are other things going on. There are oil prices, there is the growth story. All of these things will be taken into consideration when we make a decision on what we will or will not do on 17th of April."
The RBI kept its policy repo rate on hold at 8.50% at the mid-quarter review on Thursday, warning on resurgent inflation risks, and put pressure on the government to trim the fiscal deficit one day before the federal budget.
India has set a fiscal deficit target of 5.1% of gross domestic product (GDP) for 2012/13 which is lower than an upwardly revised 5.9% for this fiscal year. The gross borrowing target stands at Rs 5.7 trillion for 2012/13 compared with Rs 5.1 trillion in this year.
Gokarn said it was "very, very, important" to remain committed to capping the subsidy bill.
In his budget speech, Finance Minister Pranab Mukherjee capped the subsidy for 2012/13 under 2% of GDP, which some analysts believe is an ambitious target in case there is no significant pass through of fuel prices.
Gokarn expects cash deficit to be close to the RBI's comfort zone of around Rs 600 billion in the first fortnight of April following the two cuts in banks' cash reserve ratio since January, regular debt purchases since November and on government spending next month.
However, he ruled out buying debt through open market operation (OMO) for supporting government bond yields.
"Liquidity management is something we use OMOs for. We don't use OMOs to target (government bond) yields," said Gokarn.
Concerned that April may see front-loading of government bond supply, dealers have been hoping for the RBI to conduct debt buys that can create room for banks to buy at auction.
Another RBI deputy governor, H.R. Khan, who was at the same event, said managing the government borrowing programme in 2012/13 will be a challenge and the RBI can use tools like issuing floating-rate bonds to conduct the borrowing.
Khan heads the central bank's government bonds and foreign exchange markets departments.
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