The Reserve Bank of India’s (RBI) “appropriate monetary policy” is absorbing excess liquidity and helping efforts to tame inflation, the finance minister told parliament on Wednesday. Pranab Mukherjee, responding to an opposition-sponsored debate on inflation, also said rising prices were a cost of rapid expansion of Asia’s third-largest economy. “If I want to compromise with growth rate of 5 percent, or 5.5 percent, if I want to compromise with my export growth, if I want to do that, I can surely control the inflation,” he said. Wholesale price index, India’s most closely watched inflation measure, have risen more than 10 percent from a year earlier for the past five months. The index rose 10.55 percent in June and is expected to record a double-digit rise in July.
Spiralling prices have led to street protests against the Congress party-led government, and the opposition parties have accused it of not doing enough to control prices. “Appropriate monetary policy is mopping up excess liquidity,” Mukherjee said. “We have ensured the excess liquidity in the market has been mopped … The Reserve Bank is keeping its eye constantly on that.” The RBI has said it will manage liquidity to ensure an excess does not prevent policy signals from being transmitted to the monetary system.
Since March, it has raised its main lending rate four times by a total of 100 basis points to 5.75 percent and the borrowing rate by 125 basis points to 4.50 percent. The cash reserve ratio, the proportion of deposits that banks must keep with the RBI as cash, is 6 percent, up from 5 percent in mid-January. Prime Minister Manmohan Singh expects headline inflation easing to 6 percent by December, but the RBI sees this level only by end-March. Mukherjee said plans to wind-down stimulus measures instituted in the wake of the global economic crisis in 2008 would also help, but said this had to be gradual to keep the economy buoyant. The country needs to match the double-digit growth of peer China to pull out of poverty the hundreds of millions of citizens who live on under $1.25 a day.