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RBI hints at policy rollback

The Reserve Bank of India (RBI) could look at rolling back its expansionary monetary policy, which it started as the nation’s economy was hit by the global financial meltdown and a local industrial downturn, reports HT Correspondent.

india Updated: Jul 31, 2009 22:03 IST
HT Correspondent

The Reserve Bank of India (RBI) could look at rolling back its expansionary monetary policy, which it started as the nation’s economy was hit by the global financial meltdown and a local industrial downturn.

“The current monetary and fiscal stance is not the steady state. The Reserve Bank needs to roll back the special monetary accommodation,” RBI governor Duvvuri Subbarao said in his JRD Tata Memorial lecture organised by the Associated Chamber of Commerce and Industry (Assocham) on Friday.

However, RBI will continue to pursue an accommodative monetary policy until economic conditions improved, he added, while signalling a need to reverse expansionary policies.

The challenge for the Reserve Bank was to maintain a comfortable liquidity situation while at the same time anchoring inflation expectations, he added.

Subbarao said that the increased fiscal deficit, which the Centre this fiscal year projects at 6.8 per cent of the gross domestic product, would pose “more than a proportionate challenge” on the monetary side.

Subbarao said that the monetary stimulus from the central bank came through a sharp reduction in the policy interest rates and the cash reserve ratio (CRR) — the share of bank deposits that must be kept as cash with the RBI by commercial banks — and a lower statutory liquidity ratio (SLR) that requires banks to park funds in specified bonds. “The potential liquidity made available by the Reserve Bank as a result of these measures amounted to Rs 5,60,000 crore, nearly 9 per cent of GDP,” he said.

Subbarao also said that the increased fiscal deficit would pose “more than a proportionate challenge” on the monetary side.