By CA Anupam Petkar

Topics Covered

FRBM Introduction

Budget Deficit

Borrowings from RBI Borrowings from RBI

Monetary Policy

Government Securities Market

Prices of Govt. Securities, RBI & FRBM Act

The Fiscal Responsibility & Budget Management Act , 2003

FRBM is an Act of Parliament to institutionalize financial discipline,reduce India’s Fiscal deficit , improve macroeconomic managementand overall management of the Public funds by moving towards aand overall management of the Public funds by moving towards aBalanced Budget. The main purpose was to eliminate Revenue deficitof the Country and to bring Fiscal deficit to a manageable 3 %.

It also casted an obligation on Central Government to take suitablemeasures to ensure greater transparency in its fiscal operations in thepublic interests .

Budget Deficit

Budget deficit – excess of expenditure over revenues- a case of fiscalimbalance.

harmful consequences like mounting inflation, deficit in balance ofpayment, etc.payment, etc.

Adverse affect on growth of the economy.

FRBM Act has been introduced as fiscal correction policy toovercome the deficit budget and fiscal crisis.

In the fiscal year 2013-2014 a Budget deficit is equal to 4.50 % GDP.

Borrowings From Reserve Bank Of India

Prior to FRBM Act

Central Govt. deficits monetization by RBI – deficit financing State Govt.’s deficits financing through borrowings from the State Govt.’s deficits financing through borrowings from the

Central Govt.

Post FRBM Act

Complete phase out of deficit monetization by RBI from 2006 Central Govt. to borrow from Market for funding budget deficits State Govt.’s could borrow from market as well. FRBM equivalents were proposed for State Govt.’s also.

Borrowings From Reserve Bank Of India..post FRBM Act

Central Govt. to borrow from the RBI only in exceptionalcircumstances.

RBI allowed to subscribe to the primary issues of Central Govt. RBI allowed to subscribe to the primary issues of Central Govt.securities up to March 31, 2006.

But RBI was allowed to buy and sell Central Govt. securities in thesecondary market.

Unfortunately as on Jan 30, 2012, the accommodation by RBI wasRs.16,177 Crore in the form of Ways & Means Advances andOverdraft. This is nothing but monetization of deficit by RBI.

Monetary Policy

Management of money by RBI based on demand and supplyparameters

Quantitative policy and rate adjustments Quantitative policy and rate adjustments

Quantitative policy involves increasing or decreasing central bankmoney through OMO

Rate adjustments involve calibrating the Repo and Reverse Repo rates.

The key parameters monitored are inflation and GDP.

Government Securities Market

Need of Govt. for large amount of money

Revenue by way of taxes and income from ownership of assets.

Government Securities Market – Imp source of Govt borrowing Government Securities Market – Imp source of Govt borrowing

Issuance of Govt. securities for short-term and long-term funds

Govt securities are sovereign debt obligations of any authority of govt

Government Securities Prices , RBI & FRBM Act

Prior to FRBM Act

Prices of Government securities ( G sec ) Market werecharacterized by Administrative interest rates & captive Investors.

Such administrated rates affected yield structure and led to highinterest rate environment .

Post FRBM Act & Withdrawal of RBI from Primary Market

Introduction of auction process Development of primary market for G –Sec Development of an efficient process for price discovery Encouragement of secondary market for these securities Greater flexibility to RBI with a greater flexibility in its conduct

of Monetary Policy.

Government Securities Prices , RBI & FRBM Act

Post FRBM Act & Withdrawal of RBI from Primary Market

Continuous High Fiscal Deficit financed by issuance of G-Sec

Absorbs large amount of free funds with Banks and FIs

Less available funds with Banks for productive credit Less available funds with Banks for productive credit

Impact on pushing cost of funds upwards

Pressure on Monetary Policy of RBI for management of Yields

Market encouraged by news that new Govt. to struck to the fiscal deficitof 4.1% of the GDP.

Govt. has planned to bring down fiscal deficit to 3 % by 2016-17.

Status of Implementation of Fiscal Targets over a period of 10 Years

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