New Delhi: India’s accommodative monetary policy may continue until the end of March, with the need for tightening once inflation picks up, a government panel that advises the prime minister said on Wednesday.
Former central bank governor C. Rangarajan, who heads the panel, said growth in the fiscal year that ends in March 2011 would accelerate to 7 to 8% after growing by about 6.5% in 2009/10, with inflation at around 6 percent by the end of March 2010.
“The stance of monetary policy will have to change from its highly accommodative position. But that has to wait. It will depend on the growth prospects of the economy and also inflationary pressures,” Rangarajan told a news conference.
The Reserve Bank of India is expected to keep interest rates on hold when it meets for its quarterly policy review on 27 October, with many economists predicting a tightening in rates starting in early 2010.
The Reserve Bank of India slashed its key interest rate by 425 basis points to 4.75% between October 2008 and April and the government cut import and factory gate duties and boosted spending to shield India from the worst of the global downturn.
India’s wholesale price inflation rose by 0.92% in the year through 3 October, below forecasts, but economists expect it to accelerate quickly in coming months as the base effect from last year’s high energy and commodities prices recedes and food prices remain high.
The Prime Minister’s economic advisory council also forecast a consolidated fiscal deficit, which includes shortfalls at the state level, of 10.09% of GDP in the current fiscal year, compared with 8.6% last year, and the influential panel urged a return to fiscal consolidation.
The Indian economy grew by 6.7% in the fiscal year that ended in March, slower than the 9% or more in the previous three years, and top government officials have repeatedly stressed the need to maintain pro-growth policies until a recovery gains momentum.
The Reserve Bank of India is independent but consults with the government on policy.
The central bank’s comfort zone on inflation is seen to be roughly 5%.
On Tuesday, Prime Minister Manmohan Singh said the economy could grow between 6 and 6.5% in the year to March 2010, despite uncertainty over global economic recovery.
The panel of advisers said on Wednesday growth in the current fiscal year would be at least 6.25% and could reach 6.75%.
The panel said the recently poor summer monsoon would erode farm output in the current fiscal year by 2%, although 8.2% growth in both the industrial and services sectors would help offset that.