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Monetary Policy Measures Complement Finance Ministrys Policies Aimed at Controlling Inflation and Promoting Sustainable Growth: FM

Finance Minister, Shri Pranab Mukherjee has welcomed the Monetary Policy 2010-11 announced today by the Reserve Bank of India. Finance Ministers observations on Monetary Policy are as under:

Earlier today the Governor of the Reserve Bank of India announced a set of new monetary policy measures. The well-balanced measures, which involve raising the repo rate, the reverse repo rate and the CRR by 25 basis points each, reflect a mature and balanced view of the needs of our economy and I fully endorse the measures. They complement well the policies of the Ministry of Finance aimed at controlling inflation and promoting sustainable growth. These policies should have a gentle impact in tightening money in the economy and should dampen further inflationary pressures.

The Reserve Bank of India has made a forecast of inflation of 5.5% for the year 2010-11. Long-run inflation is very difficult to predict and is based on some statistical analysis but also on intuition. My own belief based on analysis done in my ministry is that inflation is now on a downward trajectory and in 2010-11 will be less than 5.5% and, in fact, closer to 4% with an upward bias.

The small tightening of credit and other policy changes are in the right direction. It has to be recalled that these policy rates were lowered in the last two years in order to combat the fall-out of the global recession on the Indian economy. India has now bounced back, with growth seemingly back on track and inflation, though high, on a clear downward trend. Hence, I believe that it is time to move back towards "neutral" policy rates, that is, rates that should prevail when an economy is stable and on track. I view these changes as moves towards normal times.

Inflation is extremely sensitive to the weather condition and how that affects agriculture and agricultural expectations. If nothing untoward happens on the weather front, my belief is that overall inflation has peaked and should be on a downward trajectory from now on. Actually food price inflation has been going down for a while now. The reason why the overall WPI was at the same level in February and March is because there was a slight increase in non-food inflation. Usually when that happens it calls for economy-wide demand tightening and the RBI policy announcement may be viewed as a judicious move towards that.

Some observers may worry that tightening of credit can dampen growth especially in the durable goods sector. But our analysis of industrial growth and credit off-take suggests that there is no reason for such apprehension. In fact these policies will aid sustainable growth.

Let me add that the overall economic scenario in India now looks extremely robust and better than it has any time in the last two years. I congratulate the Governor of the RBI for his able stewardship of monetary policy. It has been very well synchronized with fiscal policy and has played a major role in Indias healthy recovery.


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