RBI Governor D Subbarao may have completed a turbulent one-year in office but the road ahead will be a tightrope walk. But his goal is clear—India will have to exit its easy monetary policy sooner than other countries as inflationary pressures begin to surface.
Clearly, Subbarao minced no words to convey his focus on winding up the expansionary monetary policy, though he did not put a finger on the timing.
\"Maintaining the stimulus until a recovery is firmly in place and withdrawing it soon enough so that inflationary forces do not take hold, is a judgment call that every central bank will have to make.
But we may have to make that call sooner than most other countries,” said Subbarao.
He added that the current expansionary fiscal and monetary state was not the ‘steady state’ and needed to be exited.
Even as the governor\'s words send feelers to the market, certain analysts are already talking about liquidity mopping measures to come into play sooner than rate hikes.
HSBC in a recent report said, “It seems premature to be thinking about a near-term rate hike as the rise in inflation is commodity driven rather than the result of a long period of strong demand.
A Cash Reserve Ratio (CRR) hike in October-December (quarter) cannot be ruled out.\"
Subbarao, however emphasised that the complex task at hand will need a cautious and balanced approach.
\"We need to take measured and timely action and make a balanced judgement, not to be too benign, but also not go over-board with excessive or premature tightening,\" he said.
Now as the RBI governor makes clear that tension between monetary and fiscal policy will soon start building up, all eyes will now turn to the imminent battle between the government and the central bank to see who the victor will be.