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Finmin expects RBI to tighten policy

Last updated on: April 13, 2010 19:48 IST

RBIThe Reserve Bank of India is likely to further tighten its monetary policy in its April 20 policy review to tame rising inflation, Financial Services secretary R Gopalan said.

"I share the view of some experts that some further amount of tightening is required," Gopalan told reporters on the sidelines of a function in New Delhi.

The central bank is reviewing its monetary policy on April 20 and is widely expected to further hike its key rates and/or ratio to rein in rising inflation.

The overall inflation, based on wholesale prices, has risen to 9.89 per cent in February, much beyond the projection of 8.50 per cent that the RBI had expected for March-end.

"Inflation will certainly be an issue which the RBI will take into account," the finance ministry official said reasoning for his view.

"The inflation figure in March will be on the higher side. But if the rise is across-the-board, some tight monetary measures can be expected from the Reserve Bank," chief economic advisor Kaushik Basu said.

"If the inflation is not high across-the-board, when we break it up, there will not be any action," he said, adding, "the higher IIP index will not increase fears of inflation." According to Basu, it is expected that March inflation will be high.

From July onwards, however, inflation will become very low, he said. "The base effect will come into play in the next three months. From July onwards, it will be very low," he said. An average monsoon would help in alleviating inflation but if there is a drought like last year, then there would be some upward pressure on prices, Basu pointed out.

In January, the central bank had raised the cash reserve ratio, the amount that banks are mandated to park with the Reserve Bank, by 75 basis points to 5.75 per cent.

It was followed by another round of monetary action in March where RBI raised its short term lending and borrowing (repo and reverse repo) rates by 25 basis points each to 5 per cent and 3.5 per cent, respectively.

On the kind of instruments the central banker might use to further tighten its monetary stance, Gopalan said, "What instruments they will use, it is for them to decide."

However, Gopalan agreed that there is an issue of growth and the central bankers will have to strike a balance between growth and inflation.

On the issue of recapitalisation of banks, Gopalan said the proposal of Rs 15,000 crore (Rs 150 billion) has been sent to the Cabinet for its approval.

However, the State Bank of India has not approached for any recapitalisation from the government and they are looking for alternatives to raise capital, he said.

On the fast rising rupee, which has been impacting IT companies and exporters, Basu said, the rupee rise is good news in one way as it means more inflows which show the country as a good investment destination. The situation, however, needs to be monitored carefully, he said.

He, however, cautioned against any policy measures to tame foreign fund flows saying, "don't temper with inflows with legislative kind of restrictions or with some market operations, or with some sterilisation measures," as such measures will send out bad signals.

He also praised RBI for managing the currency exchange fluctuations very well. On the macro-front, he said the government is committed to reducing total debt to 68 per cent of GDP by 2015 from the high 82 per cent at present.

"It was a commitment we did in our budget that we will reduce our total debt to 68 per cent of GDP in the next five years. So, all the global rating agencies have given a better rating for us due to this budgetary commitment," he said.

At present, the country's debt is a high 82 per cent of the GDP according to the estimate of the International Monetary Fund and 77-78 per cent according to the government estimate, the chief economic advisor said.

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