A reversal in monetary policy stance may be possible by December-January, by which time inflation should decline, Prime Minister?s Economic Advisory Council (PMEAC) chairman C Rangarajan said on Saturday. Speaking at Bancon 2011 here, Rangarajan said inflation should taper off to 7% by March 2012, adding that the Reserve Bank of India?s (RBI) tight monetary policy was justified given that inflation had become well-entrenched in the economy.

?As for containing demand pressures, it is imperative to rein in the fiscal deficit. Efforts will be made and policy changes introduced so that the fiscal deficit remains at the budgeted level,? he said.

The RBI has raised interest rates 13 times since March 2010 in a bid to control inflation, which has topped 9% for nearly a year.

Asked whether corporate entities should be allowed to foray into the banking space, he said ?it is debatable?, adding that the central bank may want to set aside the issue for the time being and find out whether there are ?fit and proper? applicants from the non-corporate business.

The PMEAC chairman believes there should be no bar on the entry of new banks. Mergers and acquisitions in the industry, Rangarajan said, should come from a felt need and there is little point in imposing a merger. ?There is a need for large banks, but the regulatory regime must impose conditions on these institutions,? he said.

Rangarajan said non-performing assets (NPAs) of banks in areas like power and aviation, which are not doing well, need to be watched. Moreover, banks must also watch out for liquidity risks which will increase because of maturity mismatches. ?Increased exposure to real estate and infrastructure would lengthen the maturity of bank assets,? Rangarajan said, adding it was true that there is always pressure on the quality of bank assets in a period when growth moderates.

Rangarajan also observed that the availability of government capital through the budget sets a limit on the expansion of credit by public sector banks. Unless a long-term programme of injecting capital into PSU banks is not drawn up, the market share of these banks will have to come down and the slack will have to be taken up by the existing and new private sector banks.

The infusion of funds by the government since the initiation of reforms into public sector banks amounts to less than 1% of GDP, a figure much lower than that for many other countries.

As against R6,000 crore budgeted in the current year, the government will have to come in with supplementary demand for grants between R4,000 crore and R10,000 crore for meeting the capital requirements of state-owned banks.