RBI hints at tightening money supply

Effective assessment of the inflation process and the use of monetary policy actions at the right time would be critical to enhancing the effectiveness of the country's economic stimulus action, RBI deputy governor Shyamala Gopinath said today.

"Once the recovery gains further strength and sustainability,  return to the fiscal consolidation path would be critical to containing the constraints to the high growth path," she said.

Her comments come in the backdrop of the strong recovery in growth in the second quarter of 2009-10 at 7.9 per cent, "that has now created an 'inflation-growth' outcome for India, which is divergent from the pattern being seen in the advanced economies as well as several major emerging economies."

With revival in demand for credit from the private sector, the significance of fiscal consolidation would become more apparent. While higher growth itself would contribute to some consolidation from the revenue side, the quality of fiscal consolidation needs to be guided by rationalisation of expenditure, Gopinath pointed out.

The RBI, she said, has already started the first phase of 'exit' from the stimulus action in its October 2009 policy statement, though primarily in terms of signaling the stance rather than affecting the liquidity conditions or the interest rate. The evolving growth-inflation conditions will dictate the future course of actions from the RBI, she added.

In India, besides the industrial and overall recovery in growth, the overall business confidence has improved significantly. This, however, has given rise to expectations of a surge in capital flows into the country, she pointed out.