RBI finds exit route tricky

The challenges before India, as the economy revives on the growth path, is different from the challenges faced by other countries, said the RBI deputy governor, Ms Shyamala Gopinath. India is facing the risk of an upturn in inflation, so the process of exit from accommodative monetary policy would have to be nuanced as per each country’s needs.
She said the policy challenge is to exit from the stimulus packages “so the attention has shifted from managing crisis to managing the recovery.” Ms Gopinath was inaugurating the India China Financial Conference 2009 in the presence of a delegation of Chinese Banks.
Referrring to the effect of resumed capital inflows on India’s growth prospects, she said the costs and benefits needed to be considered in managing the impact of foreign fund flows.”
She, however, added that its timing in each country will largely depend on the respective macroeconomic and financial market conditions. “There is, however, no doubt that given the level of integration among the economies, each country will also have to take into account the external factors,” she said.
Explaining the qualitative difference of the exit debate in India, she said most of the countries do not face an immediate risk of inflation, whereas India is actively confronted with an upturn in inflation.
As per the latest information available, wholesale price index (WPI) inflation, on a year-on-year basis for the week ended October 17, 2009 was at 1.51 per cent largely on account of the base effect of sharp increases in prices recorded a year ago. However, there are emerging signs of underlying inflationary pressures.
So the precise challenge for the RBI is to support the recovery process without compromising on price stability. This calls for a careful management of trade offs. A premature exit will derail the fragile growth but a delayed exit can potentially engender inflation expectations. The balance of judgment is that it may be appropriate to sequence the ‘exit’ in a calibrated way so that while the recovery process is not hampered, inflation expectations remain anchored.

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