How Subbarao defends RBI's monetary stance

Reserve Bank of India Governor D Subbarao said on Tuesday its monetary stance is aimed at reinforcing the government's policy actions that will have a 'positive impact' on growth.

A revival in investment activity, which is key to stimulating growth, depends particularly on the recent policy announcements by the government being translated into effective actions, Subbarao said while announcing the second quarterly review of the monetary policy.

"Monday's statement by the Finance Minister reaffirming commitment to fiscal consolidation will open up space for monetary policy to restrain inflation and support growth," he said.

Among other factors, Subbarao said, the stance of the credit policy is to reinforce the 'positive impact' of the government policy actions on growth as inflation risks moderate.

He said that as recent policy initiatives by the government start yielding results in terms of revitalising activity, they will open up space for monetary policy to work in concert to stimulate growth.

"However, in doing so, it is important not to lose sight of the primary objective of managing inflation and inflation expectations," Subbarao added.

Finance Minister P Chidambaram on Monday announced a five year roadmap for fiscal consolidation to promote investments, contain inflation and take India to high growth trajectory.

Besides, the government has announced a slew of reforms measures, including raising diesel price, capping supply of subsidised LPG cylinders and further liberalising FDI policy, to stimulate economic growth.

Praising the government's recent policy decisions to revive economy, Subbarao said there is an urgent need to improve investment.

"Domestically, a revival in investment activity, which is key to stimulating growth, depends on a number of factors.

"In particular, recent policy announcements by the Government, which have positively impacted sentiment, need to be translated into effective action to convert sentiment into concrete investment decisions," he said.

The Reserve Bank of India had projected gross domestic product growth of 7.3 per cent for 2012-13.

In the first quarter review in July, it was revised downwards to 6.5 per cent on an assessment that risks to domestic growth from the global slowdown, weak industrial activity and slower growth of services had materialised.

Image: D Subbarao | Photograph: Reuters