Exit from easy money policy to tame inflation: Govt to RBI

“The exit from current expansionary policy stance has to be so calibrated that the recovery process is sustained and inflationary expectations remain well anchored,” the Centre said in its Mid-Year Review for 2009-10 which was tabled in Parliament by Finance Minister Pranab Mukherjee.

Exit from policy
The timing and the pace of the exit from accommodative policies should depend upon the strength of the recovery, it added. Following the global financial meltdown in September 2008, RBI took host of measures to make available liquidity to the fund-starved industry. Later, with the economy showing signs of recovery and also inflationary pressure becoming evident, RBI in its October policy initiated the first phase of exit by raising statutory liquidity ratio (SLR), the portion of funds banks invest in government bonds, by one percentage point to 25 per cent and withdrawing some other steps.

With the food inflation nearing 20 per cent in December and the second quarter growth rate touching 7.9 per cent, there are expectations that RBI may tighten credit in its January review of the monetary policy.  RBI Deputy Governor Subir Gokarn had recently said that exiting from the accommodative money policy has to be a gradual process and cannot be done at one single stroke. “When you talk of exit policies, you have to see it as a graded process and not a one-off approach.”
Press Trust of India