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Govt Ready With Key Legislations On Reforms: FM

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The government will take steps to support the Reserve Bank's battle against stubbornly high inflation, which is likely to see further rate rises, the finance minister said, a day after the bank's surprisingly high interest rate increase.

"I don't think we have reached the end of tunnel," Pranab Mukherjee said on Wednesday, referring to the RBI's rate tightening cycle.

The Reserve bank of India 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 percent in June, remains well above its comfort zone of 4-4.5 percent 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.

Costlier Loans

The RBI's decision is likely to make auto, home and corporate loans expensive and many banks have indicated that they would increasing their lending and deposit rates in response to the hike announced by the central bank.

Admitting that inflation at 9.4 per cent in June was "reasonably high and unacceptable", Mukherjee said it was a global phenomenon and the whole world was reeling under the impact of rising prices of fuel and other commodities.

The government and the central bank are taking steps to check price rise, he said, adding "I am optimistic that measures taken by the RBI by adjusting the crucial rate will have impact and inflation will come down".

The inflation, Mukherjee said, might not come down to below 6-7 per cent by the end current financial year.

Need To Rein In Fiscal Deficit

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 percent of GDP for the current fiscal year, economists have said, from New Delhi's 4.6 percent 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 percent, or 50 basis points higher than in a poll last week.

The repo rate is now 8.00 percent.