Ahead of third quarter review of monetary policy, Reserve Bank Governor D Subbarao met Finance Minister Pranab Mukherjee to discuss the macro-economic situation of the country and ways to deal with escalating prices motivated by a weak rupee. Subbarao termed it as a standard practice for RBI Governor to discuss the state of economy with the finance minister before review of the monetary policy.
The third quarter review of monetary policy is scheduled for January 24, 2012, and its outcome is eagerly being awaited on two accounts. First being the issue of interest rates. The central bank has hiked interest rates 13 times since March 2010 to deal with the persistently high inflation. In its last review in December, the RBI kept the policy rates unchanged and said that it might go for rate cuts in the future as inflation moderates.
As per the latest numbers released by the government, headline inflation for the month of December came in at a two-year low of 7.47%. Moreover, food inflation also entered the negative zone in mid-December and stood at (-) 0.42% as of January 7.
The second issue being the slowdown in economic growth, where the government has cuts its growth projection from 9% to about 7% for the current financial year. The gross domestic product (GDP) during the first half slipped to 7.3% compared to 8.6% in the corresponding period a year ago. Further during July-September quarter, growth dipped to 6.9%, the lowest in almost 2 years.
Along with this, the RBI and the government are also confronted with fresh challenges of weakening rupee which puts further pressure on inflation. Besides, slackening industrial growth leaves limited choices for the RBI and the government, especially in view of difficult global economic environment.
Mukherjee said, ‘the global economic developments has ‘once again brought into focus the need for better co-ordination between monetary and fiscal policies towards improving overall economic stability and growth.’ But with inflation easing, Indian industry is expecting the RBI to reverse the interest rates tightening cycle and ease the liquidity crunch.
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