The Reserve Bank of India (RBI) will roll back the special monetary measures if the government commits itself to fiscal discipline by chalking out a fiscal consolidation plan and the economy shows more definite signs of recovery, RBI Governor Duvvuri Subbarao has said.
“The Reserve Bank needs to roll back the special monetary accommodation,” he said at the JRD Tata Memorial lecture organised by industry body Assocham here.
The challenge for RBI was to maintain comfortable liquidity while anchoring inflation expectations, he said. RBI has made available potential liquidity of Rs 560,000 crore, nearly 9 per cent of Indias’s gross domestic product, to help the country face the liquidity crisis following the global financial meltdown, which was triggered by the collapse of America’s iconic investment banker, Lehman Brothers, in mid-September. Defending the counter-cyclical spending by the government and the accommodative monetary policy of RBI, Subbarao said these measures were required to cushion the economy from the onslaught of the global credit crisis.
He, however, agreed that the sudden and rapid expansion of the government’s borrowing programme had impeded “monetary transmission”.
“Government borrowing resulted in firming up of yields, notwithstanding the substantial excess liquidity, militating against the low interest rate regime that we want,” Subbarao said.
This year, RBI would have to manage the delicate balance between government borrowing and maintaining ample liquidity to meet the demand for private credit as it picked up in the coming months, he said.
