BALANCING ACT FOR RBI

BALANCING ACT FOR RBI
The Economic Times, October 22, 2009, Page 9

THE PM’s key advisory team on economy believes the government should continue to stimulate the economy, ensure a good rabi harvest and facilitate more private investment in power. While being optimistic about a decent 6.5% growth this fiscal, the PM’s economic advisory council chief C Rangarajan tells ET in an interview that it is vital to have a carefully-calibrated exit plan from the stimulus measures as the large fiscal deficit is unsustainable. Excerpts:

What is the right time to exit the stimulus measures?

Basically, the sign of economic recovery must be sound. If we are getting a growth of 6.5% or exceed this level, in the next year, we can begin to withdraw the additional sops given to specific sectors. Then the sectoral support may not be necessary. What we need to do is to stimulate the economy in general.

Do you expect the abundant liquidity in Western markets to flood India if inflationary pressures prompt RBI to harden the monetary policy, raising the interest rate differential?

As things stand today, capital inflows do not pose a serious problem. It may add around $31 billion to the reserves but will not cause a serious concern. I do not foresee capital inflow rising at the pace it did in 2007-08. But the higher inflow is definitely helping the private sector to maintain investments in the economy. Foreign direct Investment is better than last year’s. Companies are also able to raise external commercial borrowings more comfortably than they could last year. FDI is not volatile, portfolio investments can be. But it adds to the liquidity and strengthens the market. There is no need to change policies unless the inflows shoot up sharply and rapidly.

When do you expect the RBI to move away from the policy?

It depends on the RBI’s assessment of growth and inflationary pressures. If inflationary pressures are not pressing, the RBI may not move away from the accommodative policy. Unless inflation breeches 6%, the monetary authorities may not take action. The RBI has to do a balancing act.