The Reserve Bank of India said that exiting from low interest rates largely depends on balancing risks associated with inflation, fiscal consolidation and capital inflows. However, Shyamala Gopinath, RBI deputy governor said that the exit measures would be introduced gradually, step by step.
Gopinath while inaugurating the 3rd India-China Finance Conference said , "...its (exit from low interest rate regime) timing in each country will largely depend on the respective macro-economic and financial market conditions, factors like strong aggregate demand conditions and a well functioning domestic banking system may pave the way for early, yet gradual, exit from the expansionary policy."
He said that because of strong interdependence of the economies, each country would also have to consider external factors.
In India, signs of good economic growth, normal financial markets and well functioning of the domestic banking industry led to a tighter monetary policy last month. RBI however did not tweak the key interest rates.
During the previous 13 months, RBI had reduced repo rate, the rate at which it lends to banks, from 4.75 percent to 4.25 percent. The regulator bank also reduced the reverse repo rate, the rate that it pays banks on their overnight deposits.
With the increase in inflation it would be difficult for the apex bank to manage the trade off between growth and inflation expectations.
The governor said, "Premature exit will derail the fragile growth, but a delayed exit can potentially engender inflation expectations. The balance of judgement at the current juncture is that it may be appropriate to sequence the 'exit' in a calibrated way so that while the recovery process is not hampered, inflation expectations remain anchored"
RBI also stressed the need for governments (both sate and centre) to adopt fiscal consolidation measures whenever the signs of economic recovery become more prominent.