RBI MAY REVIEW EASY MONEY POLICY

RBI for rollback of monetary expansion to check inflation
The RBI governor, D Subbarao, today made a strong case for a rollback of the expansionary monetary policy being pursued to combat the impact of the global financial meltdown, saying it could result in another bout of inflationary pressure.

"Creation of high power money in the face of large fiscal
deficit...is not costless; it can sow the seeds of the next
inflationary cycle," Subbaro said, delivering the JRD Tata
Memorial lecture organised by the industry body Assocham here.

RBI had made available a potential liquidity of Rs
5.60 lakh crore, nearly 9 per cent of Gross Domestic Product
(GDP), to help the country tide over the liquidity crisis
following the global financial meltdown triggered by the
collapse of America's iconic investment banker Lehman Brothers in mid-September.

Noting that RBI would continue to pursue an accommodative monetary policy until the economic conditions improve, he said, "reversing the expansionary policies is definitely on the agenda (of the central bank).

"The current monetary and fiscal stance is, however,
not the steady state. The Reserve Bank needs to roll back the special monetary accommodation", he stressed

The RBI, Subbarao said, will roll back the easy monetary
policy after the government shows credible commitment to
fiscal responsibility and the economy manifests more definite signs of recovery.

The challenge for the central bank is to simultaneously
maintain a comfortable liquidity situation and anchor
inflationary expectations, he said.

Inflation, which has been in the negative zone since
June, fell to (-)1.54 per cent for the week ended July 18 even as prices of essential food items like cereals, pulses, fruit and vegetables rose.

The Governor said the RBI's objective is to
simultaneously maintain price stability, financial stability
and growth but it cannot do much to tame a supply driven
inflation except as a line of defence in extreme situation.

Noting that the government borrowing programme has
increased substantially, the Governor said it militates
against the low interest regime.

"Government borrowing had resulted in firming up of
yields, notwithstanding the substantial excess liquidty,
militating against the low interest rate regime that we want," Subbaro said.