The Reserve Bank of India (RBI) on Monday said that the timing and sequence of exit from an easy monetary policy were still a challenge.
Commenting that there has been marked improvement in the performance of the industrial sector, RBI Governor D Subbarao said, "The challenge for RBI is to support the recovery process without compromising on price stability."
While gross domestic product growth for the second quarter increased to 7.9 per cent compared to the first quarter growth of 6.1 per cent, inflation based on the wholesale price index shot up to a 13-month high of 7.31 per cent in December compared to 4.78 per cent in November. This was above the central bank's projection of 6.5 per cent and way above its comfort level of 5 per cent.
Subbarao also said the timing and sequencing of exit from the expansionary fiscal and monetary policy occupied central place in RBI's policy matrix.
The central bank is scheduled to release the third quarter review of monetary policy on January 29 amid expectation it would increase the cash reserve ratio, or the proportion of deposits that banks set aside, by 50 basis points to suck out liquidity from the system. Banks on Monday parked close to Rs 70,000 crore (Rs 700 billion) with RBI through the reverse repo window used to suck out liquidity.
The central bank had lowered key policy rates after the global financial crisis intensified in September 2008 to avoid any impact on the Indian market and spur economic activity.
But with economic activity picking up in recent months, inflation rising and the rupee coming under pressure due to higher capital flows, RBI and the government are expected to withdraw the stimulus gradually.
Subbarao said the contagion of the global financial crisis was effectively contained by coordinated fiscal and monetary measures and described India's growth in the quarter through September as "robust".
