Mumbai: The Reserve Bank of India (RBI) needs to take a balanced approach towards monetary tightening although it does not have a clear timeframe for shifting policy yet, its governor Duvvuri Subbarao said on Thursday.
“The current state of expansionary monetary and fiscal policy is not the steady state. We need to exit out of it. We need to unwind,” Subbarao said in response to a question at a banking conference.
“We’ve got to do it at the appropriate time, in the right sequence. It’s not as if I know when we are going to it and I am not telling the market. We have no clear idea because this is an uncertain situation,” he said.
The finance secretary Ashok Chawla said on Wednesday he did not see any monetary tightening in the foreseeable future, even though inflation could be 5 to 6% by the end of the fiscal year next March, above the central bank’s projection of 5%.
“We need to take measured and timely action, and make a balanced judgement; not to be too benign but also not go over board with excessive or premature tightening,” Subbarao said.
Data on Thursday showed the wholesale price index (WPI) fell 0.12% in the year to 29 August, a 13th consecutive weekly fall, although the food articles sub-index rose 14.8% as a poor monsoon pushed up food prices.
The annual change in the WPI is expected to turn positive in coming weeks as the sharp rise in commodity and fuel prices last year passes from calculations. On a weekly basis, the WPI has been rising since March.
The RBI cut its main lending rate by 425 basis points between October and April and added massive liquidity to markets as the global downturn hit Asia’s third-largest economy harder than expected.
The first change in policy could come through withdrawing some of this liquidity, such as by reversing some of the sharp cuts in the cash reserve ratio for banks, rather than a rate rise, analysts have said.
The economy grew 6.7% in 2008-09, slower than rate of 9% or more growth clocked in the previous three years, and policy makers expect it to slow towards 6% in 2009-10.