In an interview to a leading media, Reserve Bank of India (RBI) Governor D Subbarao remarked that the room for monetary easing is limited over the next few months because of the outlook for inflation and outlook for growth.
He said the central bank would take into account the fiscal consolidation measures and deficit projections by the finance minister in the coming Budget to decide on the monetary policy action.
Specifically, the central bank would look at the headline fiscal deficit number, and the quality of the fiscal adjustment. An important variable for monetary policy calibration is the fiscal adjustment that the government will do. The government will come up with deficit status in the budget.
On February 28, the finance minister would present the 2013-14 Budget in the Lok Sabha. The government aims to restrict fiscal deficit in the current financial year at 5.3 per cent of GDP and bring it down to 4.8 per cent in 2013-14.
Though the WPI-based inflation in January has come down to 6.62 per cent, lower than RBI’s March end projection of 6.8 per cent, Subbarao said the high current account deficit could escalate inflationary pressures.
There is pressure on the central bank to bring about an environment of price stability, and for the government to understand that we need fiscal consolidation, price stability for long-term growth, Subbarao said.
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