Tension between fiscal, monetary policies to hit stability:RBI

“These tensions between fiscal and monetary policies could potentially militate against financial stability. If governments continue to incur large fiscal deficits, it will be that much more difficult for central bank to maintain price stability,” RBI Governor D Subbarao said in his valedictory seminar at the FICCI-IBA seminar here.

Making a case for early return to the path of fiscal consolidation, he said, “in India too, we are confronting the dilemma of managing the tension between fiscal and monetary policies.”

Noting that price stability is a necessary condition for financial stability, Subbarao said, “higher inflation could also push the yield curve upwards. This could result in ... adverse implications for bank’s profitability. This again could impair stability.”

Financial stability

The government in its budget for 2009-10 proposed to raise Rs 4.5 lakh crore from the market, up from Rs 3.1 lakh crore in the previous year and pegged the fiscal deficit at 6.8 per cent of the GDP as against 6.2 per cent in 2008-09.

Noting that preserving and strengthening financial stability is a complex challenge, Subbarao said, “we need to be vigilant about protecting our financial stability as developments anywhere in the world can affect us.”

RBI, he said, has set up a multi-disciplinary Financial Stability Unit, which would come out with regular financial stability reports. The first report will be out in the next few months, he said.