The Hindu Business Line : Govt to strive for benign interest rates, stable prices

FOR PRICE STABILITY & BENIGN INTEREST RATES: The Finance Minister, Mr P. Chidambaram, with the RBI Governor, Dr Y.V. Reddy, prior to a meeting of the RBI Board in the Capital on Saturday. - Kamal Narang

New Delhi , March 5

THE Finance Minister, Mr P. Chidambaram, on Saturday said that the Government would work with the Reserve Bank of India to ensure price stability and a benign interest rate regime.

"I have requested and promised the RBI Board to work with it to ensure price stability. I also requested the RBI to ensure that interest rates remain benign," he said after a customary post-Budget meeting with the RBI Board.

Mr Chidambaram said that benign interest rates are necessary to allow banks to lend to industry and agriculture at competitive rates.

A release issued by the RBI said that during the meeting, the Finance Minister said that he would strive to borrow less than budgeted for the coming fiscal as would be the case during the current year.

Besides low inflation and benign interest rates, the Finance Minister also hoped that growth momentum for the economy would continue.

He expected banks to become more competitive and efficient and thus lower their spreads that were still high. He also recognised the challenges posed before the RBI in managing the monetary environment in the face of strong capital inflows.

The Finance Minister explained that the Budget had to keep in view various factors such as the mandate of the Common Minimum Programme and the recommendations of the Twelfth Finance Commission (TFC), while at the same time it had to ensure that the momentum of growth would be maintained. He pointed out that the implementation of recommendations of the TFC meant a burden of Rs 26,000 crore on the fiscal side or 0.75 per cent of the gross domestic product.

On the revenue constraints, Mr Chidambaram said that while the Constitution does not allow taxing of agriculture, the thrust on globalisation means that both customs and excise duties have to be brought down. Moreover, there is little flexibility on the personal income-tax and there are limits to increasing corporate tax to maintain the significant momentum for growth and business confidence.

He said that in these circumstances, the Government could not meet the fiscal deficit target to the full extent mandated under the Fiscal Responsibility and Budget Management Act and he had to take a pause on the revenue deficit.

On his part, the Governor, RBI, Dr Y.V. Reddy, expressed satisfaction that growth has been higher, backed by lower than expected inflation, during the current year. He hoped for a similar outcome next year, unless there are unexpected developments.

The Governor specifically mentioned Budget announcements on the proposed amendments to the Banking Regulations Act and the Reserve Bank of India Act and stated that these would provide the basis for the next stage of banking sector reforms.

The meeting was also attended by Dr Rakesh Mohan, Secretary, Economic Affairs; Mr K.M. Chandrasekhar, Secretary, Revenue; and Mr D. Swarup, Secretary, Expenditure.

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