Subbarao fears fiscal deficit to fuel next crisis


The Reserve Bank of India (RBI) governor, Duvvuri Subbarao, expressed fear that the next financial debacle could stem from a currency crisis or from the way the government handles its ‘stimulus exit’. Speaking at the first International Research Conference organised by RBI here on Saturday, Subbarao said,

“I worry that in resolving this financial crisis, perhaps we are sowing the seeds of the next crisis. Next crisis could be a currency or a fiscal crisis.” The central banker, however, denied that RBI would back out from its commitment to full convertibility of rupee but would impart flexibility to its pre-determined course in the light of the recent global economic developments.

Participating in a panel discussion, the RBI governor said the developed economies may fail to wind down their borrowings, leading to cyclical deficits morphing into ‘structural fiscal deficits’, affecting the system as a whole. In the wake of global credit crisis, following the US sub-prime crisis in 2008, many governments and central banks pumped in huge funds and resorted to low-interest-rate monetary policies, for boosting their sagging economies. These have resulted in bloating of fiscal deficits. (more…)

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