In a signal that interest rates would remain benign for another few months, the Prime Minister’s Economic Advisory Council (PMEAC) today said the current monetary policy stance would continue till March. The council said the accommodative policy should be phased out but the timing would depend upon economic revival and inflationary pressures.
“The existing monetary policy stance will have to change, but only after taking into account growth prospects and inflation. The accommodative policy may continue till March. After that, some measures will be taken to change it and then the process of fiscal consolidation will start,” PMEAC Chairman C Rangarajan said while presenting the economic outlook for 2009-10.
The council’s expectations from the monetary policy came a day after Finance Secretary Ashok Chawla hoped the Reserve Bank of India (RBI) would continue the soft policy stance when it announces its second-quarter review of the credit policy on October 27. To help the economy deal with the global slowdown, RBI has reduced the repo rate from 9 per cent to 5 per cent in various stages in the last one year.
Rangarajan said the expansive stance was taken because of exceptional circumstances but now the economy was entering a “more normal” phase of expansion. He said given the present inflationary pressures, India might have to act earlier than the US and European economies. The council is expecting inflation to rise to around 6 per cent by March from 0.9 per cent in the week ended October 3.
“The timing, the pace and the manner in which the monetary stance is gradually brought back to a relatively neutral stance will depend on the pace of expansion that various sectors of the economy exhibit and the magnitude of inflationary pressures,” he said.
In its first-quarter review of the monetary policy in July, RBI had left the rates unchanged. Bankers and analysts are also expecting the central bank to continue with the easy policy till March.