Subbarao defends tight monetary regime

Defending the Reserve Bank's tight credit policy, its new Governor D Subbarao on Tuesday said the apex bank would push financial sector reforms to accelerate high growth, but watch the scenario before unveiling any further monetary measures.

"Not tightening the monetary policy...would have eroded confidence in the economy...we will be monitoring the situation continuously and closely and take appropriate action," he said in his maiden press conference as RBI Governor here.

On financial sector reforms, Subbarao said that it was a key factor in financing our nine per cent growth over the last few years. "To sustain and accelerate this growth, financial sector reforms will remain important," he said.

However, he made it clear that financial sector reforms should promote inclusive growth through efficient and easily accessible financial services.

Elaborating on the runaway inflation, Subbarao said that without tightening of monetary policy, the impact on growth and the impact on the poor may have been severe.

He maintained that the inflation now at 12.34 per cent was, however, a short-term and global phenomenon and that its momentum has come down in the recent past.

The apex bank will watch those sectors which drive demand, in particular, those driving growth, Subbarao said.

Monetary policy transmission takes time, the RBI Governor said, adding that, "besides, we will also have to watch developments in the global markets and their potential impact on our economic management."

"The current high inflation is primarily an outcome of supply-side pressures as well as demand-side factors and is a short-term phenomenon, largely driven by international commodities, crude oil, metals and food prices," he said.

To support a healthy growth, inflation and inflationary expectations are to be contained, he said.

"The current high inflation is primarily an outcome of supply-side pressures as well as demand-side factors and is a short-term phenomenon, largely driven by international commodities, crude oil, metals and food prices,"Subbarao said.

In a bid to contain inflation, the apex bank had hiked its Cash Reserve Ratio (CRR) and short-term repo rates by 1.5 per cent and 1.25 per cent respectively since April.

Subbarao said the recent moderation in growth was only a cyclical down-turn, adding that,"the structural India growth story is still intact and credible."

The Government and the RBI would shortly bring out a comprehensive report of the committee on Financial sector assessment, he said.

"We need to draw a roadmap that responds to our immediate and medium term needs. Obviously this is a shared responsibility of the Government, the RBI and indeed all other regulators," Subbarao said.

An average 9 per cent growth in the economy in the past few years waas mainly led by the rise in private consumption, increasing private investment and surge in exports, Subbarao said.

"I believe these engines of growth are still on track," he said.