The Hindu Business Line : Right exit strategy

The RBI, in its second quarter Monetary Policy Review, clearly states its focus areas when referring to its fundamental commitment to price stability while being supportive of the growth process. As with several central banks around the world, the RBI too faces the dilemma of getting the exit strategy and its timing right.

Our view has been that the RBI would focus on withdrawing excess liquidity from the system before hardening the key policy rates. This is evident with the 1 per cent increase in SLR in what the RBI calls “the first phase of the exit”.

Sustaining growth

The central bank has hiked its WPI inflation projection at end-March 2010 to 6.5 per cent. The fact that key policy rates were left unchanged in spite of this upward revision to the inflation projection, signals that sustaining the incipient economic growth continues to be a priority.

Decline in agricultural output owing to a deficient monsoon and poor exports together with weak credit and investment growth appear to have been key concerns in holding rates. The RBI has also recognised that the current inflationary pressures are driven by supply-side constraints and that monetary policy is not the most efficient tool for reining in food price inflation.

(The author is Managing Director & Country Head – India, Fidelity International.)

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