RBI’s tight money policy will have to continue: Rangarajan

The Reserve Bank of India must continue its tight money policy until the value of the rupee is fully stabilised, the Prime Minister's chief economic adviser, C Rangarajan, said today.

"The current stance on monetary policy has to continue until stability in the rupee is achieved. Thereafter, if the current trend in the moderation of wholesale price inflation continues, which is in fact expected, the monetary authorities can switch to a policy of easing," Rangarajan, chairman of the Prime Minister's Economic Advisory Council, said while releasing the PMEAC'd Economic Outlook for 2013-14.

The time frame for this is difficult to specify and much depends on stability in the foreign exchange markets, he said.

The rupee depreciated to 63.50 against the dollar on Thursday from 54.99 on 31 December. Raghuram Rajan, who took over as Reserve Bank governor on 4 September, has said that apart from monetary stability, the central bank has the mandate to work for inclusive growth and development as well as financial stability.

Rangarajan said, "There is a big dilemma facing the RBI because controlling inflation, maintaining price stability, is one of the major objectives of the monetary authority." Ihe primary responsibility for price stability rests with the Reserve Bank, he said.

Moreover, Rangarajan lowered the growth forecast for the current fiscal to 5.3 per cent from 6.4 per cent projected earlier. Inflation at the end of March is estimated at 5.5 per cent.

He said if the rupee was not under pressure, the monetary policy would have been eased by now.

"Therefore, the dominant factor influencing the monetary authority will be the stability in the foreign exchange markets and if the stability in the foreign exchange markets continues, it will give greater room for the monetary authorities to act," he said.