RBI cautions states on fiscal discipline as bond yields rise

Flagging sharp rise in state bond yields, the Reserve Bank of India (RBI) has cautioned states against pre-election populist spending and fiscal slippage, especially in Bihar and Maharashtra.

- Subhana Shaikh

At a meeting with state finance secretaries last month, RBI governor Sanjay Malhotra urged states to keep borrowing in check and adhere to fiscal deficit targets under the Fiscal Responsibility and Budget Management (FRBM) framework, four people aware of the matter said.

The central bank's concerns were not reflected in a brief postmeeting statement, but have since gained urgency amid rising yields and expanding welfare commitments. The caution comes as market worries have deepened over the financial burden of populist schemes, the people cited above said on the condition of anonymity.

“The governor emphasised on the importance of fiscal discipline for promoting economic growth and prosperity,” the RBI statement on the 35th Conference of State Finance Secretaries had said on September 18.

RBI is particularly worried about states that are simultaneously facing extended monsoonrelated losses and pre-election spending pressures, according to two of the four people cited earlier.