The Hindu Business Line : RBI may not hike rates till economy recovers

The Reserve Bank of India indicated on Tuesday that it will maintain low interest rates till it is totally certain that the country has recovered from the global financial crisis, even as it cautioned that inflationary pressures are building up.

“In taking a call on the monetary policy on exiting from the accommodative monetary policy, we will not exit until we are assured that recovery is secure. But soon thereafter we will have to unwind the accommodation,” the RBI Governor, Dr D. Subbarao, said here at a conference.

Price rise

Referring to the Wholesale Price Index (WPI) rising by 5.2 per cent in April-August and Consumer Price Index (CPI) growing in double digits, he said India may have to exit from the stimuli given for perking up the slowing down economy sooner than most other countries.

However, he said, “If India withdraws (from the expansionary fiscal and monetary policies) earlier than other countries and raises interest rates, then we will have capital flows coming in. This will be a problem with so much of liquidity going around.”

There was a lot of liquidity sloshing around in the world and if India’s interest rates are out of line with interest rates in other countries, some of that liquidity might its find way into the country, Mr Subbarao noted, adding that the central bank will certainly keep this factor in mind while framing exit policies.

He, however, said though the country does not want a flood of liquidity, but measured capital flows that will fill the current account deficit.

“The problem that we had in 2006-08 was that capital flows were far in excess of the current account deficit,” the RBI Governor said.

Exit strategy

He said while formulating the exit policy, the RBI will look at several factors, including inflation based on the WPI and the CPI, particularly non-food inflation, capital flows, credit expansion and the Index of Industrial Production.

Making a distinction between advanced and emerging economies with respect to the financial crisis, he said while in advanced economies the crisis originated in the financial sector and spread to the real sector, in the emerging economies the crisis originated in the real sector and then the problems transmitted to the financial sector.

He said it was important for the RBI to adopt solutions to suit India’s situation, adding that even the G-20 recognised that different countries would follow different exit policies. “There will be coordination in exit policies, not exactly synchronisation,” he said.

Earlier, the Finance Minister, Mr Pranab Mukherjee, had said the time has not yet come to take away the stimulus packages given to industries to withstand the impact of the global financial crisis. At the recent G-20 meeting in London, the Finance Ministers and central bank governors had agreed to continue the stimulus measures.

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