The Reserve Bank of India (RBI) has tapped on the brakes. The increase in the cash deposit rate from 6.5% to 7% is welcome, but inadequate. With public spending ballooning and asset prices bubbly, the central bank needs to apply the brakes considerably more firmly.

True, the rate of wholesale price inflation—RBI’s preferred measure—dropped recently from a peak of 5.9% to around 4.3%, and that in the face of rising oil prices. But retail prices matter more. An average of India’s four measures of consumer price inflation shows that inflation is running at close to 8%, according to Lombard Street Research. Inflation in rural districts is particularly high.

If inflation—correctly measured—is actually 8%, then real short-term interest rates are around zero. The monetary evidence points in that direction. RBI has increased its repurchase rate by 1.5 percentage points, to 7.75% in the past 18 months, but money supply growth has accelerated from 19% to 22%. With credit growth also running near 25%, India is enjoying a liquidity glut even with 8.5% economic growth. That explains soaring asset prices.

In theory, rapid economic growth should lead to an improvement of the government’s budgetary position. Not so in practice. Public spending in the first four months of the fiscal year, which ends in March 2008, has outrun the 17% planned increase in spending. Government borrowing is up 21% over last year.

This has affected the balance of payments. The payments deficit in 2006 was a manageable 3.3% of GDP, and exports in the months of April and May were up 20%. But non-oil imports in those months were up a startling 47% over the previous year. That caused the trade deficit to widen from $8.2billion (Rs33,292 crore) to $13.3billion.

Fiscal braking seems unlikely while the present government is in office. That means the monetary brakes should be applied more firmly. Otherwise, the excessively fast growth could end in a crash.