RBI: Prepare for effects of West Asia crisis

India should be prepared for the implications of prolonged crisis in West Asia, which would push up oil prices, Reserve Bank of India (RBI) governor said on Thursday.   

Unrest in Egypt has sparked fears of supply shortages and pushed up crude oil prices.                                           

In India, higher crude prices can either be passed through to consumers, further fanning stubbornly high inflation, or can be absorbed by the government, adding to its subsidy bill and straining its fiscal postion.                                           

"Given the situation in the Middle East, we are hoping it is settled. But should that be prolonged there will be implications on oil prices so we have to be prepared for this," said RBI governor Duvvuri Subbarao.                                           

Subbarao said is counting on the government to tighten fiscal policy. Finance minister Pranab Mukherjee will present the
budget for the new fiscal year starting in April to in parliament on February 28.  

"We are hoping and expecting that the central government will come up with a credible fiscal consolidation plan for the medium term and for immediate 2011-12," Subbarao said.

"From the perspective of the RBI, fiscal consolidation is also important because monetary policy is most effective when there is fiscal consolidation," he added.

The government loosened fiscal policy by slashing taxes and increasing spending in the aftermath of the global financial crisis in 2008.      

Since then, it has unveiled a roadmap for fiscal consolidation and has budgeted for the fiscal deficit to be contained within 5.5% of GDP for the year that ends in March 2011.

Subbarao also added that the bank, which has raised key interest rates seven times over the past year, would set interest rates in order to rein in inflation without hurting growth. 

India's headline inflation was 8.4% in December.