Mumbai: The Reserve Bank of India has blamed the government for adding to inflationary pressures by living beyond its means and has urged the centre to push for reforms to achieve a turnaround in 2012-13. The central bank’s warning on government’s financial indiscipline comes ahead of polls in five states. Although the government has failed to meet its revenue targets through taxes and disinvestment of public sector undertakings, expenses have got out of hand forcing the centre to twice increase its borrowing. This will force the central bank to strike a balance between risks to growth and inflation, RBI said. Given the central bank’s reiteration of the pressures on inflation it is widely expected that RBI will not cut rates. However,there is a significant section which feels that governor D Subbarao may go for a cut in the cash reserve ratio to release liquidity. The continuing liquidity crunch is evident from daily bank borrowings from RBI. On Monday, the overnight borrowing by banks touched Rs 1,41,000 crore—much higher than RBI’s comfort level of around Rs 60,000 crore. “Expansionary fiscal policy is likely to impact price stability by affecting aggregate demand. Since the fiscal expansion is largely on revenue account and capital spending remains low, it can adversely affect the supply responses needed to lower long-run inflation,” RBI said in its quarterly report on macroeconomic and monetary developments which is released on the eve of its policy review. In its report, RBI said that economists and other forecasters have lowered growth projections for 2011-12 to 7% from 7.6% three months ago. But forecasts for inflation remain unchanged at 8.8% even as the rupee-dollar exchange rate is expected to end the year at 52, sharply lower than 47 projected earlier. Agreeing with the forecasters, RBI said that growth in 2011-12 is moderating more than was expected earlier. “The business climate has weakened. The slack in investment and net external demand may keep the pace of recovery slow in 2012-13,” it said. RBI has significantly tightened monetary policy since February 2010 with an effective increase of 525 bps in policy rates and a 100 bps increase in CRR. Experts feels that RBI governor D Subbarao may go for a cut in cash reserve ratio to increase liquidity. On Monday, the overnight borrowing by banks touched Rs 1,41,000 crore—much higher than RBI’s comfort level. “The business climate has weakened. The slack in investment and net external demand may keep the pace of recovery slow in 2012-13,” central bank said in its quarterly report.
TOI
