RBI chief Urjit Patel urges government to cut borrowing

By Aditi Shah and Suvashree Choudhury

GANDHINAGAR/MUMBAI (Reuters) - Reserve Bank of India (RBI) Governor Urjit Patel urged the government on Wednesday to show some progress in cutting high federal and state government borrowing, just weeks before Prime Minister Narendra Modi's administration is due to unveil its annual budget.

Patel, in a speech at the Vibrant Gujarat summit, said the government debt to gross domestic product ratio was also taking its toll on the country's sovereign ratings.

India's total fiscal deficit, combining the levels of the federal and state governments, was among the highest in G20 countries, Patel said, citing International Monetary Fund data.

India's current fiscal deficit is targeted at 6.4 percent of GDP at the combined state and federal level for the year ending in March. Modi's government will announce its new federal deficit target on Feb. 1, when it unveils its annual fiscal plan.

"We have to take cognisance of these comparisons and facts as we go forward to make progress. Specifically this will help us to better manage risks for ourselves and thereby mitigate financial volatility," Patel said.

The RBI Governor also said the government needed to be mindful of subsidising credit or providing credit guarantees, saying such schemes can add to government debt.

Modi unveiled a series of incentives to provide cheaper credit to the poor, farmers, women and small businesses at a speech on Dec. 31.

"While some government guarantees and limited subventions can help, steep interest rate subventions and large credit guarantees also impede optimal allocation of financial resources and increases moral hazard," Patel said.

Patel added that India needed to ensure its medium-term consumer-prices based inflation target of 4 percent was "secured on a durable basis" while touting the importance of "low and stable inflation", sticking to his previous comments on the subject.

The RBI Governor noted as well that the central bank would continue to press ahead with a "fluid transmission" of monetary policy, while urging the government to infuse "adequate provision of capital" to the domestic banking system.

The comments came less than two weeks after lenders announced steep cuts in their lending rates.

(Reporting by Aditi Shah and Suvashree Choudhury; Editing by Rafael Nam and Nick Macfie)