Monetisation of the fiscal deficit or financing the deficit by printing more currency notes is not a benign solution. The central bank will have to consider the long-tern and the short-term consequences of monetisation, according to the Reserve Bank of India governor Dr Duvvuri Subbarao. Last week, the Confederation of Indian Industry called for monetisation of India's burgeoning fiscal deficit to aid private investment and boost the slowing economy.

Printing of money for short-term requirements is not the issue. One needs to back the printing with real resources. Higher consumer price inflation and also a lot of variables and concerns need to be kept in mind, the governor said while addressing the national executive council of the Federation of Indian Chambers of Commerce and Industry in Mumbai on Monday.

A view on monetisation of deficit would be taken at an appropriate time. We will have to wait for the full budget to be presented by the new government, Dr Subbarao said and noted that the government borrowing will be substantially higher in the fiscal year 2009-10 irrespective of a change in political configuration or policies.

The government has announced that it will raise Rs.2, 41,000 crore during April-September 2009 and a total Rs.3, 62,000 crore in the full fiscal year 2009-10, higher than the scheduled Rs.3, 06,000 crore in the previous year.

Commenting on a recovery in the economy, Subbarao said that the RBI is devising strategies to arrest the moderation in growth and, thereby, restore market confidence. Once the world economy resumes growth, India's recovery would be much faster and steeper than the rest of the world, he said.

The RBI governor admitted that the total credit flow to the industry has shrunk and warned of the global recession further affecting capital inflows and exports.

In a reply to a question on why lending rates are not coming down in response to reductions in policy rates by the central bank such as the repo, the reverse repo and the cash reserve ratio, Subbarao said this was on account of weak transmission of monetary

policy. We will do whatever we can for effective transmission of policy rates to lending rates, he said.

Apart from wholesale price inflation, the central bank's monetary policy action is based on consumer prices, GDP deflator and inflation expectations from professionals, Subbarao pointed out. The Reserve Bank of India releases its monetary policy review in the months of April, July, October and January. The next formal policy announcement for the 2009/10 fiscal year will be unveiled at about 11 a.m. on April 21.

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