The Reserve Bank of India's [Get Quote] governor said On Thursday that there is a cost to any further fiscal stimulus package as it would put pressure on credit markets. However, RBI Governor Duvvuri Subbarao did not elaborate further on what this additional cost would be.

"The government has already done its bit to help the economy come out of the ongoing financial crisis," he pointed out while participating at a conference organised by the Confederation of Indian Industry.

But yield on 10-year benchmark g-secs has moved up in the last three months on an over-supply of government bonds. This is despite the fact that the country's central bank had cut repo rate -- the rate at which it lends to banks -- by 1.5 percentage points.

The government has so far implemented three fiscal stimulus packages, which involved reducing the excise duty rates by 6 percentage points on most of the products, providing sops to exporters in terms of interest rate subvention and an additional planned expenditure of Rs 20,000 crore (Rs 200 billion).

These measures, along with a drop in growth rate of tax receipts, have led to the fiscal deficit widening to 6 per cent of the GDP. As a result, the centre's market borrowing increased to Rs 2,61,972 crore (Rs 2,619.72 billion) in the current fiscal as against an initial projection of Rs 1,00,571 crore (Rs 1,005.71 billion). 

'Next fiscal would be challenging'

After posting a growth of over 9 per cent in the three years up to March 2008, the Indian economy is projected to grow at only at 7.1 per cent in the current fiscal as per an estimate by the government's statistical agency.

But Subbarao said that India's recovery will be swifter and sharper than the rest of the world because Indian growth fundamentals are intact. On the positive side, he cited normal functioning of the country's financial markets and more than adequate foreign exchange reserves.

"In addition, there's been no wealth-loss affect and agriculture credit is also not affected due to downturn," added Subbarao.

On the question of exporters who have been hit hard by the global economic downturn, Subbarao said that the export sector can only revive if export demand is revived and the government has already taken steps to help exporters.

He also informed that RBI has set up a committee to study the gems and jewellery sector, which is one of the worst-hit sectors On Thursday, and that similar sectoral studies are needed.

From October last year, exports' growth rate has slipped into the negative zone as major markets like the US, Europe and Japan -- which collectively account for half of the world's output -- have slipped into recession.

RBI studying impact of cut in policy rates

With commercial lending rates not dropping correspondingly with the cut in repo rates, the RBI has decided to closely examine the effectiveness of the monetary policy transmission mechanism.

"Interest rates should come down, but the RBI can do only so much by taking a decision on policy rates," the RBI governor said.

On lower crude prices, Subbarao said this would yield fiscal space and the current account deficit would be reduced. The decline in inflation to 0.27 per cent in the second week of March is a healthy feature, but the consumer price index  is still high and their is no fear of sustained deflation in India because some of the indices of CPI are still hovering in double-digits.