Fiscal consolidation needed for monetary easing: RBI

Mumbai/New Delhi, Jan 28 (IANS) The Reserve Bank of India Monday said fiscal and current account deficits and inflation are major constraints in easing monetary policy.

"Monetary policy needs to continue to be calibrated in addressing growth risks as inflation remains above the Reserve Bank's comfort level and macro economic risks from twin deficits persist," the central bank said in its quarterly report on the economy a day before the credit and monetary policy review.

The RBI said although steps taken by the government to bring down the fiscal deficit to 5.3 percent of the gross domestic product target had cut near-term risks, further reductions in subsidies were needed for sustainable fiscal consolidation.

"Fiscal risks have somewhat moderated in 2012/13, but a sustained commitment to fiscal consolidation is needed to generate monetary space," it said.

The RBI last cut rates in April 2012 by 50 basis points.

Stressing the need for calibrated measures in managing the country's monetary policy, it lowered the growth forecast to 5.5 percent in 2012-13.

"Growth in 2012-13 may fall below the Reserve Bank's October 2012 projection of 5.8 per cent. Even though a modest recovery may set in from Q4 of 2012-13 as reforms and efforts to remove structural constraints get underway, sustaining this recovery through 2013-14 would require all-round efforts in removing impediments for business activity," RBI said.

"Unconventional monetary policies reduces stress, bust risk remain ahead," RBI said, adding that "balance of macroeconomic risks suggests monetary policy needs to be calibrated in addressing growth risk as inflation turns sticky".


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