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The government "firmly embraced" fiscal responsibility in last month's Budget as the nation strives to slow an inflation rate that remains elevated, Reserve Bank of India Governor Duvvuri Subbarao said.
"There has been some very welcome, although much delayed, action on correcting both the current-account deficit and the fiscal deficit over the last six months," Subbarao said, according to the text of a speech at the London School of Economics on Wednesday.
Economic growth has slowed and the pace of price increases is "still high and stubborn," he said.
The climb in the cost of living and risks from the Budget and current-account gaps will limit Subbarao to a quarter-point cut in interest rates at next week's policy meeting, according to the majority of analysts in a Bloomberg News survey. India's economy is expanding at the weakest pace in a decade as investment moderates, adding pressure for monetary stimulus.
"Credible" fiscal consolidation is "a necessary pre-condition for stabilising inflation and securing non-inflationary growth," Subbarao said.
While the current-account imbalance poses a challenge for crafting monetary policy, the threat that a rate-cut will stoke the shortfall is "much less than apprehended," Subbarao said.
That's partly because lower borrowing costs are unlikely to translate into import demand given economic growth is "sluggish," he said.
Finance Minister Palaniappan Chidambaram in last month's Budget targeted a fiscal gap of 4.8 per cent of gross domestic product in the year through March 2014, from 5.2 per cent, in a bid to avert a credit-rating downgrade.
Economic reforms
The government has taken steps in recent months to attract more foreign investment, spur exports and speed up stalled road and rail projects to revive Asia's No. 3 economy. "We can accelerate growth and improve welfare only if we effectively implement wide-ranging economic and governance reforms," Subbarao said. "Slipping up on this will amount to a costly and potentially irreversible squandering away of opportunities."
A report yesterday showed consumer prices climbing at an annual rate of almost 11 percent. Wholesale inflation probably eased to 6.6 per cent in February, a more than three-year low, according to the median estimate in a Bloomberg News survey before a report tomorrow.
Nine of 10 analysts in another survey predict Subbarao will lower the benchmark repurchase rate to 7.5 per cent from 7.75 per cent on March 19. Any reduction would be the second this year, following a quarter-point cut in January.
Gross domestic product will rise 5 per cent in 2012-2013, the slowest since 2003, according to the statistics agency.
