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RBI to tighten monetary policy
Published on 5 Dec. 2009 1:15 AM IST
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With food prices rising to an alarming level, the central bank is going to change its easy monetary stance. In its next review in January, The Reserve Bank of India (RBI) is likely to tighten the monetary policy to rein in the soaring food prices. However, any tightening of the monetary policy could hit the economic growth of the country. RBI deputy governor Usha Thorat and Prime Minister Economic Advisory Council chairman R Rangarajan on Thursday indicated that in the light of rising food inflation, which has crossed 17.5%, the country should expect a tighter monetary policy. “Clearly now going forward, the accommodative monetary stance will have to be reassessed,” Thorat said. When RBI reviewed its second quarter monetary policy in October, the country was facing a fragile economic recovery, which prompted the central bank to continue with the easy stance, she added. However, as the economy has shown a strong growth of 7.9% in the July-September quarter, RBI got the space to tighten the money supply to contain increase in food inflation, which affected the poor badly. Thorat said RBI is looking at WPI to reach 6-6.5% with an upward bias by end of 2009-10. Rangarajan also expressed concern over the rising food prices and said it must be checked, otherwise they will push up prices of manufactured items. “Food prices must be controlled, otherwise they have a tendency to lead to manufacturing inflation. This will require monetary action by RBI, especially money supply management,” he said. OECD secretary general Angel Gurria also argued for tightening of monetary policy by RBI to contain the inflation. However, economists feel that tightening of money supply would have little impact on the rising food prices as it is directly linked with the supply-side management. Thorat said 7.9% GDP growth in Q2 may prompt RBI to review its 6% growth projection with an upward bias in January review. Thorat also said the Dubai crisis will not impact the country’s banking sector as the exposure “is not significant and not a matter of concern...It is not something that materially affects their balance sheets.” She, however, admitted that the Dubai crisis can have some impact on remittances and affect those parts of the country that receive inflows from the Gulf nation in larger quantity.

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