Mumbai / Delhi: India’s modest dependence on exports will help the economy weather the global recession and recover this year, reducing the need for further stimulus, Reserve Bank of India governor D. Subbarao said.
Subbarao said he’s concerned that widening the budget deficit to finance more fiscal stimulus may prevent interest rates from declining.
Prime Minister Manmohan Singh’s government, sworn in on Friday after its re-election last week, may carry out its pre-poll promise of stepping up spending to support economic expansion.
The government’s borrowing programme has already expanded rapidly, Subbarao told an event in Mumbai on Friday. The large borrowing is going against the Reserve Bank’s efforts in trying to maintain interest rates low.
Subbarao said that pressure to have further fiscal stimulus will persist and that the central bank will manage government borrowings using all tools available.
In recent weeks, the governor has been cautioning policymakers to start thinking about reversing their expansionary steps to check inflationary pressures. The central bank has cut its benchmark interest rate six times since October.
The central bank estimates fiscal and monetary steps announced so far are worth more than $85 billion (around Rs4.01 trillion), or almost 7% of gross domestic product (GDP). The tax cuts and increased spending since December widened the federal budget deficit to 6% of GDP in the year ended 31 March, from a target of 2.5%.
Subbarao said the central bank continues to support its forecast of 6% economic growth in the year to 31 March.
Inflation, currently at 0.61%, may stay benign for a while before climbing to 4% by 31 March as the economy revives, the central bank estimated last month.