Fiscal, monetary policy clash to hit stability: RBI

Cautioning the government that growing tension between fiscal and monetary policies can hit financial stability, the Reserve Bank today said it cannot maintain price stability if the Centre continues to borrow large amounts from the market to fund its expenditure.

"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 in Mumbai.

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."

The government in its budget for 2009-10 proposed to raise Rs 4.5 lakh crore (Rs 4.5 trillion) from the market, up from Rs 3.1 lakh crore (Rs 3.1 trillion) 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.