The federal government’s large borrowing plan and the Reserve Bank of India’s willingness to support it are bound to fan inflation, Chakravarthy Rangarajan, who headed the RBI during 1992-97, said in an interview. What the central bank should be worried about is how high the inflation goes up, he said.
- India will miss its fiscal deficit target of 6.8 per cent of gross domestic product by at least 1 percentage point, with overall government borrowing, according to his estimates, rising to 16.3 trillion rupees
- Such borrowing plan cannot happen through normal sources and thus RBI’s support is essential to see it through
- India can achieve 9 per cent growth rate in the absence of a third wave of the pandemic, he said. That’s slower than the 9.5 per cent pace forecast by the RBI
- India’s potential growth has been falling from much before the pandemic. The most important component for India’s growth is investment as a part of GDP and that figure is going down from past several years
- “Best way to stimulate growth in the short- and mid-term is really by raising the investment,” Rangarajan said. “The government should do whatever it can to raise capital expendiuture”
- RBI will continue to build up some more reserves if flows keeps coming in
- However, there’s the possibility that flow of funds will weaken once interest rates are reversed in advanced economies and already there are signs that interest rates will be reversed in those economies
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