The Hindu Business Line : India will have to reverse expansionary stance soon: Subbarao

Mumbai, Sept. 10 India would exit the expansionary monetary regime sooner than other countries as inflationary pressures were showing up, according to Dr D. Subbarao, Governor, Reserve Bank of India.

He, however, did not mention the timeline for exiting the accommodative regime.

“We need to unwind (the expansionary monetary policy regime), we need to exit at the appropriate time, in the right sequence. We have no clear idea. We are watching it,” he said.

The reversal of India’s monetary policy stance would be coordinated with other central banks globally, he said.

“Co-ordination does not mean synchronisation; co-ordination does not mean everybody exits at the same time. Co-ordination means everybody understands what others are doing,” Dr Subbarao said. “We need to take measured and timely action, and make a balanced judgement — not to be too benign, but also not go overboard with excessive or premature tightening,” he said.

He pointed out that tensions between fiscal and monetary policies could impact the country’s financial stability as the rising fiscal deficit would make it tougher for the central bank to maintain price stability.

“If governments continue to incur large fiscal deficits, it will be that much more difficult for central banks to maintain price stability. While the current crisis has shown that price stability is not sufficient to ensure financial stability, price stability is decidedly a necessary condition for financial stability,” he said while delivering the valedictory address at the FICCI-IBA banking seminar.

fiscal consolidation

He said it was imperative that both the Central and State Governments in India returned to a path of fiscal consolidation for a number of reasons, including the need to preserve financial stability. Rising yields could result in mark-to-market losses for banks, thereby, impacting their profitability, and impinging financial stability.

“Higher inflation could also push the yield curve upwards. This could result in significant mark-to-market losses for fixed income instruments with potentially adverse implications for banks’ profitability. This again could impair financial stability,” Dr Subbarao said.

He also categorically stated that India would not slow down on reforms.

“We will not slow down on reforms, but will surely rework the road map to reflect the lessons of the crisis,” he said.

But he pointed out that managing the trade-off between growth and financial stability would be a challenge.

“Tightening of risk weights arguably tempers the flow of credit to certain sectors, but excessive, premature or unnecessary tightening could blunt growth. Similarly, exposure norms offer protection against concentration risks; however, such limits could restrict the availability of credit for important growth sectors,” he said.

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