India has taken a deliberate hit to its finances by cutting duties to counter a rise in inflation, which was mostly due to high oil and commodity prices and surplus cash in the economy, the finance minister said on Saturday.
Data out the day before showed inflation had only declined marginally in mid-August from a three-and-a-half-year high near 8 percent. But Finance Minister Palaniappan Chidambaram and the central bank have reassured markets that it will subside.
The yield on the 10-year federal bond fell to a new month-low of 6.0587 on Saturday, though it came off a session low of 5.9999 percent on worries that the minister's talk of excess liquidity could mean more official efforts to reduce it.
Some traders also interpreted comments by Chidambaram about increased lending to manufacturing and farms as a sign that the government frowned upon banks putting too much money into bonds.
"Banks must find more bankable projects to which to lend rather than keep their money in government securities," Chidambaram said. "If a higher level of investment is the key to economic growth, banks must lend more to agriculture, to industry and other productive purposes."
Chidambaram said the government had absorbed some of the impact of high oil prices, even though this could widen its fiscal deficit, already one of the world's highest at a forecast 4.4 percent of GDP for the year to March 2005.
"We are going to try (to meet the deficit target). We have taken a deliberate hit in order to moderate prices, particularly petroleum and in steel," Chidambaram told reporters on the sidelines of a meeting of Indian banks in Bombay. "That is a conscious decision taken, it is not a decision taken in secret."
He added that interest rates were likely to be stable in the near term, as India's central bank governor has indicated.
Worries about interest rates rising in the near term have only been made worse by inflation. Data released on Friday showed wholesale price inflation had eased slightly to 7.94 percent in the year to August 14 from 7.96 percent a week earlier.
"We have no control over oil prices," Chidambaram said. "But if oil prices moderate, the fiscal steps take effect and the seasonal factors play out, inflation will moderate."
On Friday, central bank chief Y.V. Reddy had also blamed rising inflation on supply shocks and said he saw no "aggravation in demand" that required monetary measures to constrain it.
At Saturday's annual general meeting of the Indian Banks' Association, Chidambaram said more than 1 trillion rupees ($21.6 billion) credit for the agricultural sector would help farmers overcome the effects of a delayed monsoon, he said.
Last month, he had said the government aimed to raise farm credit in the year to March 2005 by 31 percent from the previous year to 1.05 trillion rupees.
As for the persistent worries about inflation, Chidambaram noted that the rate had risen to more than 8 percent at one point in 2000/01.
"But it came down - people must be patient," he said.