Even as inflation fell to a 16-month low, Reserve Bank Governor Y V Reddy on Friday said the monetary policy will remain vigilant and pro-active.
MUMBAI: If bankers were expecting any let-up on monetary policy by the Reserve Bank of India (RBI) because of dipping inflation, governor Y V Reddy disappointed them on Friday.
“It is extremely difficult to predict how the current global turbulence would play out, and so emerging market economies had to arm themselves with contingency plans and defence strategies,” he said at Sveriges Riksbank, Sweden’s central bank, in Stockholm on Friday.
He reiterated that there would be no relaxing tight monetary policy particularly when there are uncertainties in the global economy.
Reddy said emerging economies such as India were at particular risk of foreign capital being withdrawn quickly.
“Of late, considerations of macroeconomic and financial stability have assumed an added importance in view of the increasing openness of the Indian economy,” Reddy said.
Reddy said though the central bank’s preferred policy instruments continued to be indirect, such as reserve requirements for banks, it would not hesitate to use direct policy instruments - interest rates - if necessary.
The global uncertainties he referred to are high oil prices and the fallout of the US subprime market on global risk appetite.
High oil prices are an automatic concern for the RBI because India imports a majority of its crude requirement.
Bankers were hoping for some respite from interest rate hikes by the RBI because of the current decline in inflation.
Inflation has been in the decline for three consecutive weeks. On Friday, the government said it touched 3.79% for the week ended August 25, a 16-month low.
Economists do not expect the dropping trend in inflation to continue.
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