Subbarao Says India Deficit Cut Helps Rate Policy

March 9 (Bloomberg) -- Indian central bank Governor Duvvuri Subbarao said the government’s plan to narrow the budget deficit makes it easier to set interest rates in the world’s fastest- growing major economy after China.

“The reduction in fiscal deficit certainly helps in monetary-policy management,” Subbarao told reporters yesterday after a meeting of global central-bank counterparts in Basel, Switzerland. It “certainly helps both in managing inflation as well as providing space for credit demand.”

Finance Minister Pranab Mukherjee on Feb. 26 unveiled plans to cut the budget deficit to 5.5 percent of gross domestic product in the year starting April 1 from 6.9 percent the previous year, the sharpest reduction in 19 years. That means Prime Minister Manmohan Singh’s government will need to borrow less, enabling private credit to grow more strongly.

“We believe that there will be enough liquidity to meet private liquidity demand,” Subbarao said. “There is enough liquidity there and enough supply to meet the government borrowing program.”

Bond Yields Rise

The budget unveiled by Mukherjee estimates the government’s public debt sales to increase by 1.3 percent, less than the 2 percent median forecast in a Bloomberg News survey, to 4.57 trillion rupees in the next fiscal year.

Tax increases and 400 billion rupees ($9 billion) of state asset sales will shrink a debt burden equivalent to about 82 percent of the economy.

Even so, the yield on the benchmark 10-year government bond has climbed 14 basis points to 8 percent since the budget plan on inflation concerns.

Subbarao said that while bond yields have risen, they still are “reasonable” and he expects inflation to “moderate in weeks and months ahead.”

India’s inflation rate rose to 8.56 percent in January, the highest in 15 months, from 7.31 percent in December, the commerce ministry said Feb. 15.

“Yields have hardened a little bit,” he said. “We’ll manage the program in such a way that yields are within reasonable limits and interest rates don’t have a negative impact on the competitiveness of the economy.”

Subbarao has kept the central bank’s key reverse repurchase rate at a record low of 3.25 percent since April. In January, he raised the proportion of deposits lenders need to keep as cash reserves to 5.75 percent from 5 percent.

In India, where policy makers aim to achieve the fastest- growing economy in the world within four years, fiscal stimulus steps saw the deficit climb from 2.7 percent of GDP two years ago. The country’s debt level is almost quadruple China’s, according to International Monetary Fund figures.

Moody’s Investors Service ranks India’s rupee-denominated debt at Ba2, two levels below investment grade, while Fitch Ratings and Standard & Poor’s have a BBB- rating, the lowest investment grade.