"RBI (is) having to take on a tight monetary stance to offset fiscal slackness," he said yesterday while delivering a lecture at Cornell University on 'India in a Globalizing World: Some Policy Dilemmas'.
RBI raised policy rate 13 times between March 2010 and October 2011 in its bid to bring down inflation. It, thus, increased interest rate by 3.75 per cent during that period.
In its last policy review in July, RBI chose to keep interest rate unchanged citing inflationary pressure.
In 2011-12, the fiscal deficit had ballooned to 5.76 per cent of GDP on account of high fuel subsidy outgo.
The government aims to bring down the fiscal deficit- the gap between expenditure and revenue collection - to Rs 5.13 lakh crore or 5.1 per cent of GDP in the current fiscal.
Terming fiscal deficit as structural issue, Subbarao said "we have fiscal deficit in the face of current budget (revenue) deficit, implying borrowing is being used for consumption expenditure".
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"Political economy - including federalism - challenges in reducing fiscal deficit," the RBI governor said.
Analysts believe that fiscal deficit could breach 6 per cent mark in 2012-13 in view of rising oil, food and fertiliser subsidy bills and lower revenue realisation due to concerns of economic slowdown.
For the April-June period, the fiscal deficit rose to Rs 1.9 lakh crore, or 37.1 per cent of the 2012-13 target.
Subbarao said fiscal deficit is bad for a number of reasons as it also exacerbates inflation.