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Updated: April 1, 2010 23:11 IST

Manmohan asks RBI to rein in inflation

Oommen A. Ninan
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Prime Minister Manmohan Singh. File photo
The Hindu Prime Minister Manmohan Singh. File photo

Prime Minister Manmohan Singh on Thursday asked the Reserve Bank of India (RBI) to keep inflation under check, ensure stability of the financial sector and meet financial intermediation to get back the Indian economy on the high growth path and ensure inclusive growth.

“As we pursue our objective of achieving rapid and inclusive growth, our monetary and financial policies must be guided by three objectives. First, they must ensure that inflation is kept under control since it hurts the common man the most and also distorts economic signals. Second, they must ensure stability of the banking and financial sector since otherwise we run the risk of experiencing financial crises which always impose high costs. Third, they must meet the financial intermediation needs of rapid and inclusive growth,” said Dr. Singh, while speaking at the function to mark the Final Platinum Jubilee of the RBI here.

Dr. Singh asserted that the Indian economy would have a 9 per cent growth by 2011-12, i.e. the end of the 11th Five Year Plan. The Prime Minister has also directed the Planning Commission to explore the feasibility of achieving 10 per cent growth in the 12th Five Year Plan.

Acknowledging that the monetary policies cannot achieve their objective without a stable macro-economic environment, Dr. Singh said the government was committed to containing the fiscal deficit. It had increased measures for countering the effects of global crisis in the last two years.

“We allowed a large increase in the fiscal deficit in the past two years as we responded to the global crisis. This must now be reversed. We are therefore, firmly committed to bringing the economy back to a fiscally sustainable path. This involves a reduction in the fiscal deficit from 6.8 per cent of GDP in 2009-10 to 5.5 per cent in 2010-11 with a further reduction in the next two years reaching 4.1 per cent in 2012-13,” Dr. Singh said.

He said the current government policy of calibrated opening of the capital account would continue in view of its success in the current macro-economic scenario.

“In fact, in an economy open to capital flows, monetary discipline in the face of fiscal imbalances can lead to a rise in interest rates triggering excessive capital inflows, which in turn put pressure on the exchange rate, making the task of macro-management that much more difficult. This is the well known problem of the impossible trinity or trilemma. In an economy with capital mobility you cannot simultaneously have exchange rate stability and an independent monetary policy.”

Finance Minister Pranab Mukherjee said the government aimed at moving towards a modern, financial system with appropriately strengthened and autonomous regulators and central bank.

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