Central banks must co-ordinate on stimulus exit: RBI report

A Reserve Bank of India (RBI) report today made a strong case for coordination among the major central banks globally while formulating their stimulus exit strategies, which otherwise could pose major challenges to countries in the form of capital flows.

"There is a pressing need for international coordination on exit policy of systemically important countries. Lack of policy coordination in this respect could create adverse spill-overs from one country to other through interest rate differentials," the RBI said in its report on 'Currency and Finance 2008-09,' which was released here today.

With the recovery in sight, the apex bank started exiting from its easy money policy late last year by restoring the statutory liquidity ratio (SLR) to 25 per cent. It also hiked its short-term rates by 0.5 per cent and mandatory cash reserve ratio by 1 per cent so far this year.

The RBI had cut all these key rates a number of times since the impact of the global financial meltdown began to bite the domestic economy, pulling down GDP growth from a high 9-plus per cent growth in the three pre-crisis years to a low 6.7 per cent in FY09.

The report, prepared by a group of professional economists of Reserve Bank, said an early communication on exit of fiscal policy measures cold undermine confidence in the markets and aggravate recovery concerns.

"Untimely or early communication regarding the exit of certain policy measures may not be desirable and thus needs careful assessment by the policymakers," the report said.

In the face of the continuing uncertainties in global markets, RBI is in a dilemma to exit or hike its policy rates while on the other side, the economic recovery is still at a nascent stage.

Noting that central banks need to devise a calibrated exit from the accommodative stance, the report cautioned that while an early exit may derail the recovery process, delayed actions can build up inflationary pressures in the economy.

The Reserve Bank, which is scheduled to announce its first quarter monetary policy on July 27, is widely expected to hike its short-term rates (repo and reverse repo) by at least 0.25 per cent to tame high inflation, which rose to 10.16 per cent in May.