The Reserve Bank of India (RBI) is against more stimulus packages and large borrowings by the government. RBI governor D Subbarao on Friday said the new UPA government, which is slated to present the Budget some time in July, should resist pressure for another stimulus as sustained economic recovery would require fiscal consolidation in medium term.

“Given the still soft economy, the pressure to provide more stimulus will persist. While this may help in the near term, the sustainability of recovery requires returning to responsible fiscal consolidation.” Subbarao said. The fiscal stimulus packages and other measures initiated by the government to mitigate the impact of global financial crisis on the country have led to a sharp rise in expenditure and fiscal deficit, he said. “The challenge for fiscal policy is to balance immediate support for the economy with a need to get back on track the medium-term fiscal consolidation process,” Subbarao said at a financial summit here.

He said the borrowing programme of the government had already expanded rapidly. The RBI has been able to manage the large borrowing programme in an orderly manner. “Large borrowings by the government run against the low interest rate environment that the RBI is trying to maintain to spur investment demand in keeping with the stance of monetary policy,” Subbarao warned.

With every percentage point increase in the fiscal deficit, maintaining adequate liquidity in the system becomes that much more difficult, Subbarao said. “Managing this trade off between our short term compulsions and long term sustainability will be one of the big challenges,” he said. “As the monetary and fiscal stimuli work their way through, and if calm and confidence are restored in the global markets, we can see economic turnaround later this year,” Subbarao said. Subbarao also said that though deposit rates were declining and effective lending rates are falling, there was clearly more space to cut rates given the declining inflation.

... contd.