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    Jun 2009
    Spain BCN (Barcelona)

    Default Evolving growth-inflation outcome to dictate policy moves:RBI

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    The Reserve Bank of India (RBI) has categorically indicated that the evolving growth-inflation outcome will dictate the monetary policy focus on managing the recovery and on containment of inflation.

    Adderssing the Bangalore Chambers of Industry and Commerce yesterday, RBI Deputy Governor Shyamala Gopinath said the near term policy challenges would be clearly conditioned by the evolving growth-inflation outcome.

    ''Given the dominance of food price inflation in shaping the overall course of the inflation path, the policy challenge though is to address the supply constraints,'' she said, adding ''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''.

    The RBI had initiated 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 pointed.

    The RBI released Mrs Gopinath's address here today, as the meeting was a closed door one.

    The effective implementation of the monetary policy would depend much on effective assessment of the inflation process, and using monetary policy actions at the right time, she said.

    Mrs Gopinath said besides the industrial and overall recovery in growth, the overall business confidence in the country had improved significantly. 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 easy global liquidity conditions and superior growth prospects of India in the global economy.

    She said ''once the recovery gains further strength and sustainability in India, return to the fiscal consolidation path would be critical to contain the constraints to the high growth path. 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.


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