He also said the government has kept in mind while going for the fiscal deficit expansion on the quality of expenditure which is more on the capex side rather than on revenue side.
Finance Minister Nirmala Sitharaman revised the fiscal deficit for FY20 to 3.8 per cent and pegged the target for FY21 to 3.5 per cent.
She used the escape clause provided under the Fiscal Responsibility and Budget Management Act to allow the relaxation of target.
"Any investor will be very concerned by the direction of the expansion of the fiscal deficit. If we don't know where the direction is going, then there may be impact on the bond yields which may harden and FPIs may be worried to invest in India.
"But we have been very clear and we have proof on the table on the direction of the expenditure. We have not deviated from the FRBM Act and not even amended it.
"The Act was amended four times before 2014. We have remained within the four corners of the law. That is an important signal to all the investors that we have unintended consequences on the investment side. Our glide path captures that," Chakroborty told in an interaction.
He further said the market could react to the use of 'Escape' clause and the primary reaction could be hardening of the yields. "As the understanding creeps in and there is a bigger dialogue and we guess that rates would start factoring in and the yield would start falling," he said.
The secretary said: "We have outlined a very robust expenditure policy for the FY 21 where our flagship schemes are fully provided for both at RE (revised estimate) and BE (budget estimate) stages.
"In our capex for the next fiscal there is an increase of Rs 76,000 crore, in our capital expenditure biggest ever increase. That is where the quality of expenditure is and it shows the fiscal deficit expansion reasons.
"We have shifted more to capital side rather than giving a big increase in the revenue side. For this reason, we did not provide more for MGNREGA rural employment scheme which is now a big size project.
"We are constantly in endeavours to create durable assets in MGNREGA and if there is need we will provide more allocation."
Sitharaman, in her Budget speech on February 1, announced Rs 61,500 crore budgetary allocation for the Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS), down from the revised estimate of Rs 71,000 crore for 2019-20
On the financial sector steps to improve bond market, he said the Netting Bill is ready to add strength financially to the bond market.
"The market for bonds operate through credit default swaps. However everybody works on a cross margin basis. Netting wasn't there. Netting Bill is ready and it will go to Cabinet shortly and would try to put it before the Parliament for approval and this will introduce OTC trading on bonds and this is where Indian government bonds inclusion in global indices helps.
"If Indian sovereign bonds are in global indices and large amount of money flows through that, the money comes directly and the fungible amount becomes big and the yields don't harden."
In a bid to strengthen the derivatives market and free up excess leverage capital, the government has been planning to introduce a common netting law for all financial institutions and intermediaries.
Such a provision would allow companies, especially banks, to set aside capital based on their net position rather than gross while involved in counter-party settlements and trades.
Netting is a common practice followed in most advanced economies where the settlement is based on net positions in bilateral or multilateral financial arrangements rather than by gross positions.
A strong netting system generally gives rise to a thriving derivatives market, as it provides the most accurate picture of a company's financial position, solvency and liquidity risk.
In the 2020 Budget, the gross borrowing is Rs 7.8 trillion for the next fiscal year. The government has said it will borrow a net Rs 5.36 trillion from the market in 2020/21, buy back Rs 300 billion worth of bonds and switch Rs 2.7 trillion worth of debt.
(Anjana Das can be contacted at anjana.d@.in)
( With inputs from IANS )