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RBI for gradual exit from easy policy

RBI for gradual exit from easy policy
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First Published: Wed, May 12 2010. 07 48 PM IST
Updated: Wed, May 12 2010. 07 48 PM IST
New Delhi: The Reserve Bank of India (RBI) will stick to a gradual exit from its easy monetary policy as the risks associated with stronger action are high, a deputy governor said on Wednesday.
Data on Wednesday showed industrial output grew 13.5% in March, the sixth-straight month of double digit growth, but fell short of a Reuters poll median forecast for 15% expansion.
Subir Gokarn said the numbers were in line with the RBI’s growth expectations. India is seen growing 8.5% in the fiscal year that began in April, after growing about 7.2% in the previous year.
Bond yields eased after the factory output data and dealers said the lower-than-expected numbers had soothed concerns of an immediate policy action.
Gokarn also said the RBI did not see a need yet to change its policy because of the Greek debt crisis.
The RBI has said it prefers small and non-disruptive steps as it moves to return monetary policy to pre-crisis levels, but analysts have said inflationary pressures and accelerating economic growth could force swifter and sharper action.
Responding to a question on whether more aggressive measures were required, Gokarn said the RBI had taken gradual steps in recent months as it moved to hike rates and reserve requirements.
“This is a recognition that the risks associated with more stronger action are high and we would rather not take those risks,” he said at a conference.
The RBI has raised benchmark rates twice by a total of 50 basis points since March, after headline inflation hit a 17-month high of 9.9%. It had earlier lifted reserve requirements of banks, saying it preferred to use tools that had predictable effects on liquidity.
Robust growth in the world’s second-fastest growing major economy after China is boosting consumer demand ahead of what can be met by existing capacity, stoking inflationary pressures to levels the RBI sees as “worrisome.”
“India’s growth will be robust but growth figures will not match the high consensus estimates,” Sujan Hajra, chief economist at Anand Rathi Financial Securities said. “Our sense is that the pace of monetary policy will continue to be nuanced.”
The eurozone’s debt crisis is also giving Asian central banks cause to hold their monetary tightening plans, but Gokarn said problems in Greece and Europe had not yet had any major impact on Indian policymakers’ thinking.
“At this point it does not seem necessary to change our growth forecast or overall macro outlook on the basis of what is happening in Greece, given that it does not have any significant impact on our policy considerations at this point,” he said.
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First Published: Wed, May 12 2010. 07 48 PM IST