Burden of inflation mgmt solely on monetary policy: RBI

An RBI committee, headed by Governor D Subbarao, is of the view that the government, fearing fiscal slippages, has placed the entire burden of inflation management on the central bank's monetary policy.

"Most members felt that there could be a slippage in the fiscal deficit budgeted in the Union Budget 2011-12. They [members] were concerned that the fiscal situation had placed the entire burden of inflation management on monetary policy," said the minutes of the Technical Advisory Committee (TAC) on Monetary Policy meeting.

The meeting, which was held in the run up to the first quarter review of the monetary policy announced last month.

The government is aiming to restrict its fiscal deficit to 4.6% in the 2011-12, from 4.7% last year.

"Uncertainty about the fiscal situation would continue to pose a serious challenge for monetary policy," said the minutes, which was posted on the RBI website today.

As inflation continued to remain at elevated level, the committee decided to go ahead with the 25 basis points hike.

The overall inflation has remained close to the double-digit mark in the April-June quarter of the current fiscal. It was 9.44% at the end of June.

"Inflation expectations were high and wages were rising. This could worsen the vicious wage-prices spiral, which to some extent was already evident," the minutes said.

It said there was disagreement among members of the committee to raise the policy rates as four members opposed the rate hike with the view that the past monetary policy actions had an impact and the spillover was still playing out.

"In view of this, as also the fact that the uncertainty in the global environment had increased and domestic investment was slowing down, they suggested that the RBI should follow a wait-and-watch policy," it said.

Besides, one member had suggested an increase in the cash reserve ratio (CRR) by 25 basis points, while another felt that RBI could give clear signals of more stringent capital requirements in future, at least for systemically important financial institutions.

The meeting also reviewed the global and domestic macroeconomic developments and said the US debt problems could have its impact on India as well.

"It felt that the global macroeconomic situation had worsened with the uncertainty clouding the increase in the US debt ceiling issue and continuing problem in the Euro area. If the US debt crisis was not resolved satisfactorily, it would have serious ramifications for the global economy," the members observed.

Regarding the global commodity prices, the committee noted that the situation remained uncertain and that investment activity was slowing down due to a variety of factors.