Rising incomes in India and the country's high fiscal deficit are driving inflation, Reserve Bank of India Governor Duvvuri Subbarao said on Thursday.
A slowdown in revenue collections and higher spending on subsidies may make it challenging to achieve the fiscal deficit target of 4.6 percent of gross domestic product in the fiscal year ending March, the RBI said earlier in its Financial Stability Report.
Current account deficit (CAD) swelled to $14.1 billion in its fiscal first quarter, nearly triple the previous quarter's tally. The full-year gap is expected to be around $54 billion.
"Recent data indicate further widening of the trade balance. Consequently, CAD which increased during Q1 of 2011/12 is expected to widen further," the report said.
Subbarao also said, RBI will contain sharp volatility in the foreign exchange market, although he added the currency's value should be determined by the market.
The Reserve Bank of India is monitoring the forex market on an hourly basis, he said.
The rupee, the worst performer among its Asian peers, has fallen more than 16 percent since July peaks, although it has bounced off record lows hit last week after the central bank took steps to prop it up.
The trade deficit for 2011/12 is expected to widen sharply to between $155 billion and $160 billion from $104.4 billion a year ago, posing further downside risks to the rupee, which hit a record low last week.
The sovereign debt problems in Europe and global slowdown were also impacting country's growth, the RBI said.
Higher government borrowings could crowd out private sector demand for funds and investment, it said, adding domestic demand was showing weakness.
Government data released earlier this month showed country's industrial output fell in October for the first time in more than two years.
(Source-http://economictimes.indiatimes.com)
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