RBI averse to monetisation of fiscal deficit

The Reserve Bank of India (RBI) is averse to monetising the fiscal deficit as a measure to push private investment and sagging growth.

"People say monetise the deficit... Please think just not about the next three months but about next years... Monitising fiscal deficit is not just about the next three months," RBI Governor D Subbarao said at a seminar organised by industry body Ficci yesterday.

Implying monetisation was not a good idea as it can trigger inflation, Subbarao said, "We have to look at things beyond short-term."

He was responding to a question on the possibility of monetisation of deficit from Ficci President Harsh Pati Singhania. Last week, CII, another apex industry chamber, had suggested monetisation of deficit to reverse the slowdown in economy.

Subbarao, however, made it clear that the RBI has not taken a final view on the matter and that it would take a decision at an appropriate time.

But, Subbarao hastened to add, "I want to say there are a lot of variables and lot of concerns that we need to take into account."

The government borrowing was expected to substantially increase in the current financial year as compared to the last year, widening the fiscal deficit in FY10, Subbarao said.

"We expect the current account deficit to be higher compared to last year and capital inflows likely to be lower," he added.

"No matter what the new government will be, no matter what the new budget is, the (government) borrowing is going to be substantially higher (than FY09)," Subbarao said.

Noting that uncertainties in global markets has eroded the confidence in India, Subbrao said the crisis may further impact capital inflows and exports.

Planning Commission Deputy Chairman Montek Singh Ahluwalia had said that the country's fiscal deficit was likely to go above six per cent in FY09, much above the target.