Reserve Bank of India governor D Subbarao on Thursday said preventing a slowdown in India would be more challenging in 2009-10, while he endorsed the Centre?s inflated spending programme. ?We believe that growth moderation might be steeper than we had thought earlier. I believe 2009-10 is going to be a more challenging year than 2008-09,? he said at the CII annual seminar in New Delhi. Subbarao, however, ruled out the possibility of India seeing sustained deflation.

Subbarao said another fiscal stimulus will carry a cost, and time must be given to the previous two packages to work before planning the next one. A recent IMF projection says India would grow by 6.25% next year. RBI will release its growth projection on April 21.

In a candid appraisal of the state of the economy, Subbarao made a detailed power point presentation to industry leaders. He acknowledged that the rate cuts were not being adequately passed on by banks to consumers. RBI is talking to banks to understand why lending rates are not coming down, he said. ?The policy rates have to transmit to the banks and we are investigating about the transmission mechanism. Interest rates should come down. We set the policy rates but policy rates have to transmit through the banks.?

But ICICI Bank CEO & managing director KV Kamath said high bond yields have made it uncomfortable for banks to cut rates.

Subbarao told industry leaders that returning to a healthy growth rate of 9% would depend on the recovery in the global markets. India cannot start recovering unless there is stability, if not recovery, in the global financial markets, he said. ?It is not clear when the recovery starts, but when the recovery starts around the world, India?s recovery would be sharper and swifter than around the world?, he promised.

RBI analysis shows fresh investment by Indian industry could sharply taper off in 2009-10. At the same time income generation measures in rural India like the National Rural Employment Guarantee Programme for Rs 24,000 crore were acting as an independent stimulus package.

The finance ministry said the government would borrow Rs 2,41,000 crore in the first six months of the next fiscal. This is about two-thirds of the projected borrowing for the fiscal. To ensure that banks have the liquidity to finance such massive government debt, RBI simultaneously announced Rs 80,000-crore open market operations?the bank will buy securities from banks for cash in the same period. Gross market borrowings of the Centre are now pegged at Rs 3,61,782.79 crore in 2009-10, about 56% more than the Budget estimates for 2008-09.