High deficit not a concern for rates - Montek

By V. Ramakrishnan

MUMBAI (Reuters) - A higher-than-normal fiscal deficit should not be a concern for interest rates if government spending bridges the gaps in private investment, a policy adviser said on Tuesday.

Montek Singh Ahluwalia, the deputy chairman of the Planning Commission, also said the country would require more stimulus even if it means widening the fiscal gap.

High borrowing costs and the global slowdown have hit Asia's third-largest economy harder than expected, forcing the government to step up market borrowings to support stimulus spending.

This has pressured interest rates even after the Reserve Bank of India (RBI) aggressively cut its key lending rate by 425 basis points between October and April.

"I think clearly what will happen to the interest rates actually depends on the stance of the monetary policy and also to some extent on whether the fiscal deficit is only replacing private replacement demand," Ahluwalia told reporters.

"If private investment demand is low and fiscal deficit expands to fill that gap it should not affect the interest rates."

In February, the government set a fiscal deficit target of 5.5 percent of gross domestic product for 2009/10 (April/March), lower than 6.2 percent in the previous year, but the borrowing target has been increased to 3.62 trillion rupees ($74.5 billion) for this year from 3.06 trillion last year.

The need for more stimulus and pledge to keep poll promises of cheaper grains and other welfare schemes have sparked fears the government may breach the fiscal deficit and the borrowing target again this year.