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RBI may reverse monetary policy

New Delhi, January 7, 2012

The Reserve Bank of India (RBI) could reverse its monetary tightening cycle, if December inflation falls sharply, a senior finance ministry official said yesterday, a day after a central banker said interest rates have peaked.

The RBI has raised interest rates 13 times since March 2010 by a total of 375 basis points in its bid to control the headline inflation that has been steadfast above nine per cent for a year.

However, a rapid slowdown in food inflation in December has raised hopes of a cooling in overall inflation. Food price index fell an annual 3.36pc in mid-December.

"The RBI governor has given enough indications on what the RBI intends to do," finance ministry economic affairs secretary R Gopalan told CNBC-TV18 in an interview.

"We think if inflation is going to go down sharply, obviously Reserve Bank will take necessary measures to ease the monetary tightening." However, Gopalan refrained from specifying how the central bank will begin its policy reversal.

The data for December inflation is due on January 16, while the next monetary policy review is scheduled for January 24.

The Indian economy has been slowing in 2011 amid mounting global uncertainties and high interest rates. The pace of economic expansion slowed down to 6.9pc in the quarter through September, its weakest pace in two years.

The government is trying to bridge the fiscal deficit by selling government stakes through share buybacks but the consultative process for that is still on, only after which the plan will be presented to the federal cabinet.

Plans to sell government stakes by leveraging other assets owned by the government are still under discussion, increasing the likelihood that the government may miss the 2011-12 stake sale target of Rs400 billion ($7.6 billion). It has raised only Rs11.45 billion so far.




Tags: inflation | Reserve Bank of India | monetary | reverse |

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