The Hindu : Business : Centre, RBI to ensure price stability

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Sunday, Mar 06, 2005

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Centre, RBI to ensure price stability

By Our Special Correspondent

The Union Finance Minister, P. Chidambaram, with the Reserve Bank of India Governor, Y. V. Reddy, and facing him (from right) N. R. Narayana Murthy, Y. H. Malegam, and V. S. Vyas at a post-budget meeting with the Central Board of Directors of the RBI in New Delhi on Saturday. — Photo: Kamal Narang

NEW DELHI, MARCH 5. The Finance Minister, P. Chidambaram, said here today that his Ministry and the Reserve Bank of India (RBI) would work together so as to ensure that price stability and benign interest rates prevailed in the economy.

Emerging from the customary post-budget meeting with the RBI board at North Block, Mr. Chidambaram told waiting newspersons that he had requested the board to work with the Government to ensure price stability. "I also requested the RBI to ensure that interest rates remain benign," he said. The objective was to ensure that banks lent funds to industry and agriculture at "competitive" rates, he said.

Interestingly, the Finance Minister's wish for benign interest rates coincides with the conducive environment prevailing in recent times with inflation, based on the wholesale price index, touching a new low at 4.83 per cent during the week ended February 19 coupled with stable interest rates. At present, the RBI's benchmark Bank Rate stands at 6 per cent, while bank's prime lending rates vary between 9 and 10 per cent.

Earlier, the Finance Minister, in his address, apprised the RBI board of the various factors such as the NCMP mandate and the recommendations of the Twelfth Finance Commission (TFC), which had to be kept in view while formulating the budget even as the growth momentum had to be maintained. While the bulk of expenditure on NCMP objectives was on the revenue side, the TFC recommendations also meant a Rs 26,000-crore hit on receipts and a resultant burden on the fisc to the extent of 0.75 per cent of the gross domestic product (GDP).

Further constraints in the way of revenue augmentation, he said, were the fact that while farm income could not be taxed by the Centre as per the Constitution, customs and excise duties also had to be scaled down in keeping with globalisation of the economy. On the direct tax side, there was little flexibility available on the personal income-tax front while there were limits to hiking corporate tax to maintain the growth momentum and business confidence. In these circumstances, the Government had to take a "pause" on the revenue deficit target although it would strive to borrow less than budgeted, as would be the case this year.

Noting that the Government attached the highest importance to maintaining price stability, the Finance Minister complimented the RBI for its efforts in containing inflationary expectations during the current year. Declaring that he was looking forward to a year of growth, low inflation and a benign interest rate scenario, he said that he expected banks to become more competitive and efficient and thus lower their spreads that were still high.

The directors on the RBI board were unanimous that the budget was pro-growth while it placed greater importance on the social sector. Welcoming the initiatives taken with regard to rural credit in particular, they desired greater thrust on an appropriate interest rate environment, risk mitigation and warehouse receipt facilities in the context of their relevance to the large rural population. They also hailed the Finance Minister's concern for preventing tax evasion and suggested various measures to encourage the "cheque habit" and widen the tax base.

The RBI Governor, Y. V. Reddy, specifically mentioned the budget announcements relating to the proposed amendments to the Banking Regulations Act and the Reserve Bank of India Act and noted that these would provide the basis for the next stage of banking sector reforms.

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