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Raising rates: RBI in dilemma

india Updated: Aug 27, 2009 23:23 IST
HT Correspondent
HT Correspondent
Hindustan Times
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The money is easy. The choices are not.

The Reserve Bank of India (RBI) is in a complex dilemma. A decision on when to start withdrawing excess liquidity from the banking system and begin raising interest rates has become a challenging task for the central bank given the conflicting outlook on economic growth and inflation.

A major challenge for the RBI is to deal with the unpleasant combination of subdued growth with emerging risk of high inflation, RBI said in its annual report released on Thursday. It said “while withdrawal of monetary accommodation entails the risk of weakening recovery impulses, sustained accommodation and the associated protracted phase of high money growth can only increase inflation in future.”

The report said the external economic environment is unlikely to remain congenial for supporting a faster recovery in India. Despite improved financial market conditions and thaw in the pace of contraction in global activity, the recession in developed countries is widely perceived to persist in 2009.

“The IMF has suggested that global growth would contract by 1.4 per cent in 2009 and volume of world trade would also decline by 12.1 per cent,” it said, adding that the recovery is widely perceived to be gradual, and even with the upward revision to the IMF’s growth outlook for 2010 at 2.5 per cent, that would represent just about half of the growth achieved in 2007.

The Centre’s macro economic policies should now concentrate on reverting to the high growth path at the earliest, with broadbased “inclusive” growth. “As external operates as a major drag on the recovery, growth impulses have to depend even more on domestic demand than in the past and public expenditure has to take the lead in boosting aggregate demand,” it said.