New Delhi, Oct. 19 -- When a government, the biggest borrower in the system, spends 40% of its revenues on interest, monetary tightening has serious consequences. It affects the government's capacity to spend, its future borrowing requirement and the central bank's room for manoeuvre. India's interest-rate raising cycle, therefore, raises a question: how can the Reserve Bank of India (RBI) restore monetary stability without aggravating an already demanding fiscal adjustment?

A recent International Monetary Fund analysis of global debt provides a starting point. High public debt amplifies the deterioration in government finances following rate increases. Fiscal concerns, in turn, can push market rates higher. Where governments shorten the...