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Fiscal consolidation will help fight inflation: RBI

Fiscal consolidation will help fight inflation: RBI
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First Published: Fri, Feb 26 2010. 07 02 PM IST
Updated: Fri, Feb 26 2010. 07 02 PM IST
Mumbai: The Reserve Bank of India (RBI) said on Friday the fiscal consolidation in the government’s Budget would help in its fight against inflation, and said it would ensure record gross market borrowing would not unsettle the market.
Deputy governor Usha Thorat also said there would be no change in the statutory liquidity ratio (SLR), which requires banks to hold 25% of deposits in government bonds, or in the amount of government debt banks could hold free of mark-to-market accounting requirements.
“No we are not doing it,” Thorat told reporters when asked about the regulatory requirements after the government unveiled its budget.
The benchmark 10-year bond yield rose one basis point to 7.88% after the comment on the SLR, before ending at 7.86%, up 4 basis points on the day.
“From our point of view one of very important thing was the fiscal consolidation. So I think one would say it is positive for lesser inflation,” Thorat said of the Budget. The government projected a fiscal deficit of 5.5% of GDP in 2010-11, 4.8% of GDP in 2011-12 and 4.1% in 2012-13. It said gross market borrowing would be a record Rs4.57 trillion ($99 billion) in 2010-11, from Rs4.51 trillion in 2009-10.
Thorat said the major concerns for the Reserve Bank of India were to ensure price stability and manage the government’s borrowing programme smoothly, although she declined to comment on its strategy.
“I don’t think one would like to conjecture too much on the instruments... Keeping in view the overall maturity ladder, sustainability, I think we will be using all kinds of instruments including timing,” she said.
Thorat said any decision on whether the central bank held open market operations would depend on market conditions.
“There is lot of surplus liquidity. Taking into account all that, I don’t think it will tie our hands in making our policy,” Thorat said.
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First Published: Fri, Feb 26 2010. 07 02 PM IST