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RBI says monetary policy not free of govt's fiscal compulsions

Hyderabad: The Reserve Bank of India (RBI) has said its ability to conduct the monetary policy freely has again come under threat due to the influence of the government's fiscal policies, reports PTI.

"Like in most countries, in India too, fiscal stimulus was part of the crisis response and monetary policy had to acquiesce in elevated government borrowing.

"Going forward, the challenge for the government is to continue the fiscal consolidation and for the Reserve Bank to regain the space to conduct monetary policy free of fiscal compulsions," RBI governor D Subbarao said in the D Deshmukh lecture here on Thursday.

He said world over, central banks' monetary space has come under the dominance of fiscal policies of the governments and India followed the global trend.

"It will be less than honest not to acknowledge that the autonomy of monetary policy from fiscal compulsions is once again under threat, and resolving that threat requires credible efforts by both governments and central banks," Mr Subbarao said.

As the Centre cut duties and stepped up expenditure as part of stimulus measures to boost the slowing economy since the late 2008 as a result of the global financial crisis, its outlay overshot receipts by a huge amount, leading to widening of fiscal deficit, which crossed 6.5% of the gross domestic product (GDP) during 2009-10.

As the government partially rolled back stimulus in the budget for the current financial year, its fiscal deficit is pegged to come down to 5.5% of GDP.

To finance its increased expenditure, the government has to resort to huge market borrowings, pegged at over Rs4.5 lakh crore this fiscal.

The RBI has to manage the government borrowings in such a way that it does not lead to resource shortage for private players.

As such, the RBI may not be able to increase its rates to desired level even if it wants to contain inflation since that would push cost of borrowing for private players.

In fact, an RBI official had recently said that more aggressive tightening of monetary policy is required to tame inflation. The central bank has hiked short term borrowing (reverse repo) by 50 basis points and lending (repo) by 25 basis points to control inflation, which has been in double digits for five consecutive months.

The government, meanwhile, earned over Rs1 lakh crore from auction of spectrum, which many thought would be used for reducing fiscal deficit further. However, the government recently sought Parliament nod for additional expenditure of Rs54,588.63 crore and said its additional receipts will not lead fiscal deficit to widen.

In his reply to the debate on inflation in the Rajya Sabha, finance minister Pranab Mukherjee also said RBI is framing its monetary stance in coherence with the Centre's fiscal policies.

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