The government will take steps to support the Reserve Bank of India's (RBI) battle against stubbornly high inflation, which is likely to see further rate rises, finance minister Pranab Mukherjee said, a day after the bank's surprisingly high interest rate increase.
"I don't think we have reached the end of tunnel," Mukherjee said on Wednesday, referring to the central bank's rate tightening cycle.
RBI on Tuesday raised interest rates for the 11th time since March 2010, lifting its key lending rate by 50 basis points and reiterating it would continue with its anti-inflationary stance despite slowing growth in Asia's third-largest economy and uncertain global demand.
Although the Reserve Bank of India has raised its repo rate by 325 basis points in 17 months, headline inflation, at 9.44% in June, remains well above its comfort zone of 4-4.5% and is expected to stay high in coming months.
Analysts partially blame the government's loose fiscal policy in the aftermath of the global financial downturn for fuelling price pressures. Bottlenecks in infrastructure and agriculture have also stoked inflation.
"Appropriate measures will be taken," Mukherjee said, referring to government support of the central bank's policy action, without giving specifics.
Economists say the government needs to rein in its fiscal deficit, which is under stress in the face of a mounting subsidy bill and a slowdown in net tax revenue receipts.
A higher subsidy bill is expected to widen the government's fiscal deficit to over 5% of GDP for the current fiscal year, economists have said, from New Delhi's 4.6% target, forcing it to borrow more from the market.
Finance ministry officials have repeatedly said the government would find ways to generate revenue to meet its fiscal gap target.
Mukherjee said the government would keep its spending in check to meet its deficit target but did not give details.
"We are looking at ways to compress expenditure. There is revenue buoyancy and together I think they will help us in reaching fiscal deficit target," he said.
Early this month India announced austerity measures, including a ban on meetings in five-star hotels and restrictions on foreign travel to help curb spending.
Tuesday's aggressive rate hike and the hawkish tone of the central bank bolstered expectations for more rate increases.
A Reuters snap poll after the move found six of 11 economists expect the repo rate, the central bank's key lending rate, to go up to 8.50%, or 50 basis points higher than in a poll last week.
The repo rate is now 8.00%.