Managing recovery, stemming inflation top RBIs agenda

Written by fe Bureau | Mumbai | Updated: Dec 31 2009, 04:43am hrs
Expressing concern over the rising food rices, the Reserve Bank of India (RBI) has hinted at tightening money supply to check the inflationary pressures.

While addressing the Bangalore Chamber of Industry & Commerce on Monday, RBI deputy governor Shyamala Gopinath said the near-term policy challenges are clearly conditioned by the evolving growth-inflation outcome that supports shifting the balance of policy focus on managing the recovery and on containment of inflation.

Given the dominance of rising food prices in shaping the overall course of the inflation path, the policy challenge is to address the supply constraints. Since supply shocks take time to taper off, there is a risk that high inflation in essential commodities could affect inflation expectations over time and give rise to generalised inflation. Effective assessment of the inflation process, and using monetary policy actions at the right time, would then be critical to enhance the effectiveness of the policy.

However, Gopinath mentioned that in India, besides the industrial recovery, the overall business confidence has improved. While capital inflows have resumed after the period of net outflows in the second half of 2008-09, there is a perception that India may experience surges in capital inflows again because of global liquidity and superior growth prospects of India. Once the recovery gains further strength and sustainability in India, return to the fiscal consolidation path would be critical, she said.

Gopinath also said that with revival in demand for credit from the private sector, the significance of fiscal consolidation would become more apparent. While higher growth itself would contribute to some consolidation from the revenue side, the quality of fiscal consolidation need to be guided by rationalisation of expenditure.

The RBI has already started the first phase of exit in its October 2009 policy statement, though primarily in terms of signaling the stance rather than affecting the liquidity conditions or the interest rate. The evolving growth-inflation conditions will dictate the future course of actions from the RBI, she said.

The RBI is slated to come out with the third quarter review of its monetary policy on January 29, 2010 amid intense speculations that it may signal an interest hike to tighten money supply to contain the rising inflation. The food inflation was nearly 19% last week while the overall wholesale price inflation rose to 4.78% in November 2009 compared to 1.34% in the month of October 2009.