Inflation should moderate in the coming months and the central bank will ensure interest rate levels do not have a negative impact on the competitiveness of the economy, Reserve Bank governor D Subbarao said on Monday.
?I believe that inflation will moderate in the weeks and months ahead,? the governor told reporters in Basel.
He declined to comment on possible interest rate moves in the future, but said the central bank would ensure that their levels would not have any negative impact on the competitiveness of the economy. Subbarao said the government?s plan to narrow the Budget deficit makes it easier to set interest rates in the world?s fastest- growing major economy after China.
?The reduction in fiscal deficit certainly helps in monetary-policy management,? Subbarao told reporters after a meeting of global central-bank counterparts in Basel, Switzerland. It ?certainly helps both in managing inflation as well as providing space for credit demand.?
In Budget 2010-11, finance minister Pranab Mukherjee had unveiled plans to cut deficit to 5.5% of gross domestic product in the year starting April 1, from 6.9% the previous year, the sharpest reduction in 19 years. That means the government will need to borrow less, enabling private credit to grow more strongly.
?We believe that there will be enough liquidity to meet private liquidity demand,? Subbarao said. ?There is enough liquidity there and enough supply to meet the government borrowing programme.?
The Budget estimated the government?s public debt sales to increase by 1.3%, less than the 2 % median forecast in a Bloomberg News survey, to Rs 4,570,00 crore in the next fiscal year.
Tax increases and $9 billion of state asset sales will shrink a debt burden equivalent to about 82% of the economy. Even so, the yield on the benchmark 10-year government bond has climbed 14 basis points to 8% since the Budget plan on inflation concerns.
Subbarao said while bond yields have risen, they still are ?reasonable? and he expects inflation to ?moderate in weeks and months ahead.? Inflation rate rose to 8.56 % in January, the highest in 15 months, from 7.31 % in December.
RBI-finmin meet on govt borrowings
The Reserve Bank of India and finance ministry officials will meet by month-end to decide on the government?s borrowing plan for the fiscal year 2010/11, a senior official said on Tuesday. ?The borrowing meeting with the RBI is scheduled for end-March, finance secretary Ashok Chawla told reporters. The government is set to borrow Rs 4,57,000 in the fiscal year starting April 1, higher than the current year?s Rs 4.51,000 crore.