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Raghuram Rajan's RBI to keep monetary policy tight till rupee stabilises: PMEAC

Sep 13 2013, 16:56 IST
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Raghuram Rajan has said that apart from monetary stability, the RBI has the mandate for inclusive growth and development as well as financial stability. Raghuram Rajan has said that apart from monetary stability, the RBI has the mandate for inclusive growth and development as well as financial stability.
SummaryIf current trend in moderation of inflation continues, RBI can switch to a policy of easing.

The Reserve Bank must continue its tight monetary policy until stability in the rupee value is achieved, Prime Minister's key economic advisor C Rangarajan said.

"The current stance of monetary policy has to continue until stability in the rupee is achieved. Thereafter, if the current trend in the moderation of wholesale price inflation continues, which is in fact expected, the monetary authorities can switch to a policy of easing," Rangarajan said while releasing the Economic Outlook for 2013-14.

Related: PMEAC's C Rangarajan lowers GDP growth estimate to 5.3 per cent for FY14

The time frame for this is difficult to specify and much depends on stability in the foreign exchange markets, he said.

The rupee depreciated to 63.50 against the dollar yesterday from 54.99 on December 31.

Raghuram Rajan, who took over as RBI Governor on September 4, said that apart from monetary stability, the central bank has the mandate for inclusive growth and development as well as financial stability.

Related: PMEAC: keeping fiscal deficit target a challenge

The Chairman of the Prime Minister's Economic Advisory Council (PMEAC) said "there is a big dilemma facing the RBI because controlling inflation, maintaining price stability, is one of the major objectives of the monetary authority."

It has to take into account the impact on growth and what is happening in the real sector, but the primary responsibility of price stability rests with the Reserve Bank of India, he said.

Rangarajan today lowered the growth forecast for the current fiscal to 5.3 per cent from 6.4 per cent projected earlier. Inflation at the end of March is estimated at 5.5 per cent.

Related: Drawdown on foreign reserves to fund CAD

If pressure on the rupee had not mounted, he said, the policy easing would have continued, he said.

"Therefore, the dominant factor influencing the monetary authority will be the stability in the foreign exchange markets and if the stability in the foreign exchange markets continues, it will give greater room for the monetary authorities to act," he added.

Related: There is no case for India's rating downgrade, says Rangarajan

The RBI has multiple objectives, Rangarajan said. Price stability is one objective, while promoting growth and financial stability are the others, he said.

A balancing act is required as the Indian monetary authorities have been caught in a classic dilemma between inflation and growth in the past two years, he said.

Such a predicament

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