Monetary-tightening pace to remain moderate: RBI

Deputy Governor says stance appropriate for local, global situation.

The central bank will continue with the moderate monetary-tightening pace, said Reserve Bank of India (RBI) Deputy Governor Subir Gokarn, on Monday.

He said commodity prices are showing signs of softening and further clarity on inflation will come after seeing how the monsoon pans out in the country. He also said liquidity is expected to come back to the system on government spending.

“We have kept our pace moderate because we think this is consistent with (the) domestic situation and with the global economy still going through some turbulence. Based on what we are seeing, this stance is appropriate and will continue unless dramatic changes (takes place) in either environment,” Gokarn told reporters on the sidelines of a conference in Singapore.

The statement from RBI come even as Kaushik Basu, Chief Economic Advisor to the finance ministry, told Business Standard in an interview that key monetary policy rates should be raised gradually to ensure investment and job growth.

Signaling an increase in interest rates, RBI has raised the repo and reverse repo by 50 basis points each, while the cash-reserve ratio has been increased by 100 basis points to suck out liquidity.

India’s economy grew at 8.6 per cent during the fourth quarter of the last financial year, while it expanded by 7.4 per cent in the full year. While growth has picked up, taming inflation — that was estimated at over 9.5 per cent in April — has been identified as the biggest challenge by RBI.

The strong growth and high inflation had led to expectations of RBI resorting to an inter-meeting hike before its scheduled review on July 27, but the European debt problems have altered the picture.

Gokarn said global commodity prices are softening, but “maybe it is a temporary phase due to revaluation of global demand”. He said how the prices changes will depend a lot on how the monsoons spread across the country. “This is the immediate milestone.”

The deputy governor added that fast-recovering economies need to continue to adopt exit strategies and that reaching a “neutral position” should not be compromised.

Government bonds ended firm on Monday but gave up a substantial part of intra-day gains on view that interest rates may continue to rise here despite continuing fiscal woes in Europe, dealers said.

The 7.80 per cent benchmark 10-year government paper, maturing in 2020, settled at 7.48 per cent against an intra-day high of 7.44 per cent, and Friday’s close of 7.52 per cent. Some buying was seen towards the end of the trade after the government deferred a decision on an increase in fuel prices.

While liquidity remained tight, RBI went ahead with its scheduled auction plan of Rs 11,000 crore for this week.