The Reserve Bank of India (RBI) has quite correctly unveiled a hawkish monetary policy, given the strong rebound in the economy and the resurgence of inflation.
The government now has to make the next move in the Union Budget that is due to be announced by finance minister Pranab Mukherjeeon 26 February.
The central bank and the finance ministry had worked together in 2008 and 2009 to support domestic demand in the midst of the worst global downturn in more than seven decades. It is time to roll back the stimulus, something that most economists and policymakers agree with.
RBI governor D. Subbarao was quite candid about this in in his Friday statement, when he said: “The reversal of monetary accommodation cannot be effective unless there is also a rollback of government borrowing.”
Maintaining the Indian economy on a stable growth path requires a reduction in the fiscal deficit. A failure to do so will add to inflationary pressures and crowd out private investment. All eyes will now be on the FM.