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| RBI undecided on easing monetary policies |
| Press Trust of India / Colombo Sep 29, 2009, 16:08 IST |
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The Reserve Bank of Indfia (RBI) has said rising inflation and 'still tentative' recovery in economic growth is making it difficult for the central bank to decide whether to exit from monetary easing measures.
"Early return to the fiscal consolidation path, and exit from the expansionary fiscal and accommodative monetary policy remain the key challenge... The policy choices are becoming increasingly complex for the RBI, as signs of recovery in growth are still tentative, whereas inflation is clearly firming up," RBI Deputy Governor K C Chakrabarty said here.
"The challenge has to be seen, however, in the context of the ultimate objective, which is faster and durable recovery in growth. The costs of delay in timely exit are being discussed now; but there are costs of delay in economic recovery as well," Chakrabarty said at a recent anniversary convention of the Association of Professional Bankers of Sri Lanka.
Chakrabarty said the rising inflationary pressures could limit the scope for sustained growth supportive monetary policy stance.
Though wholesale price inflation remained low at 0.37 per cent for the second week of September, food prices are soaring which have pushed various kinds of consumer price inflation to double digits.
However, RBI cannot tighten money supply to contain inflation as growth has started picking up and is in an early stage. The Indian economy grew by 6.1 per cent in the first quarter of this fiscal, compared with 5.8 per cent in the previous two quarters.
However, economic expansion is widely expected to slow down further in the second and third quarters due to drought.
Recently, at the G-20 summit in Pittsburgh, Prime Minister Manmohan Singh said the stimulus measures being jointly pursued by the group of twenty nations should continue till normalcy returns to the global economy.
"We must certainly plan for an orderly exit when the time is right but that time is not now," the Prime Minister had said.
Following Singh and other leaders' appeal, G-20 pledged to continue with the stimulus measures until a durable recovery is achieved and to work together when the time comes to remove them.
Therefore, India also cannot withdraw these packages unless other nations agree even if inflation surges.
In terms of recent signs of improving growth prospects, Chakrabarty said there has been recovery in industrial output during April-July 2009 and higher relative growth in the core infrastructure sector during the first four months of the current fiscal.
He further said there is a revival in capital inflows, strong recovery in the stock market over the March-end level this year and increasing number of IPOs with large over-subscription.
However, the downside risks include the impact of deficient monsoon on agricultural growth, decline in exports for the 10th successive month up to July 2009 because of the persistent global recession and a drop in tourist arrivals in August 2009 — partly on account of swine flu scare.
The Reserve Bank has projected that the Indian economy is likely to grow at 6 per cent in the current fiscal and the medium-term objective is to revert to the high growth path of around 9 per cent.
"The RBI’s current growth outlook remains at 6 per cent with an upward bias. The medium-term objective, though, is to revert to the high growth path of around 9 per cent. This growth trajectory also should be inclusive with low and stable inflation," he said.
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