The easy monetary stance, which has been adopted by the Reserve Bank of India (RBI) since October last year, might be reversed before other economies due to inflationary pressures, Reserve Bank Governor D Subbarao indicated today.
“We may have to take the call (to exit) sooner than most other countries. Because as we know inflationary pressures are showing up and we need to be sensitive to them,” Subbarao said at a banking seminar organised by the Federation of Indian Chambers of Commerce and Industry (Ficci) and Indian Banks’ Association.
He, however, was candid in admitting that RBI had no clear idea on when to exit the current accommodative policy stance.
“The current state of expansionary monetary and fiscal policy is not a steady state. We got to do it at the appropriate time, in the right sequence. It is not that I know when I am going to do it and I am not telling the market. We have no clear idea,” the governor said.
RBI is not getting clear signals as the economy is yet to shift into higher growth mode following the financial crisis, but at the same time, inflationary pressure is building up due to a rise in global commodity prices and weaker monsoon in India.
Since the global financial crisis broke out in September last year, RBI lowered cash reserve ratio by 400 basis points (bps), while repo and reverse repo rates were cut by 425 and 275 bps, respectively, to infuse liquidity. The government has also announced three stimulus packages in the last one year to boost demand.
Though RBI may unwind before other central banks, the governor highlighted the importance of coordination in withdrawing the accommodative policy among nations.
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“Coordination is important but it does not mean synchronisation. It does not mean everybody does it in the same time. It means that everybody has broad understanding that when others are going to play the game,” he said.
Subbarao said the RBI has set up a multi-disciplinary financial stability unit which would put out regular financial stability report. The first report will come out in the next few months.
“This report will present an overall unified assessment of the health of the financial system with a focus on identification and analysis of potential risks to systemic stability,” he said.
Commenting that tension between fiscal and monetary policies could potentially militate against financial stability, he said, India too was confronting the dilemma of managing the tension.
“The government has asked the Finance Commission to indicate a road map for returning the path of fiscal consolidation. It is imperative that both the centre and states return to a path of fiscal responsibility, for a number of reasons, including the need to preserve financial stability.
He also assured the global financial crisis has not dented the enthusiasm for financial sector reforms.
“We will not slow down on reforms, but will surely rework the road map to reflect the lessons of the crisis,” Subbarao said.