New Technology

The Reserve Bank of India (RBI) should look at eventually reversing the expansionary policy pursued in the wake of the global economic crisis, Governor Duvvuri Subbarao said on Saturday.

"All of you would agree around the world also there is concern, there is attention being paid to reverse these expansionary policies," Subbarao told students at a banking institute. "In the Reserve Bank of India, we will be looking at reversing the expansionary policy at an appropriate time."

Subbarao did not say how or when the policy will be reversed but said he will not do it right now or in the near future.

In its efforts to stimulate the economy, the RBI has cut its key lending rate by 425 basis points to 4.75 percent since the collapse of Lehman Brothers last year. The rate at which it absorbs surplus cash from the banking system has been cut by 275 basis points to 3.25 percent.

As well, it has cut the ratio of cash that banks must deposit with the central bank to 5 percent from 9 percent in the middle of last year.

Subbarao said the stimulus measures of both the government and the central bank have worked to some extent. "Certainly we are seeing our own versions of green shoots in certain sectors like cement, steel and coal," he said.

He also said growth in vehicle sales as well as a pick up in rail freight traffic were encouraging. "But as I said, this is not a complete picture and there are a number of sectors of the economy which have to see a significant revival," he said.

In April, the RBI said it expected Asia's third largest economy to expand by about 6 percent in the fiscal year 2009/10 ending in March, below last fiscal year's 6.7 percent.

Many private sector economists forecast growth of between 5.8 to 7.2 percent. The head of prime minister's economic advisory council predicted on Saturday that growth would match at least last year's level.

Subbarao said although the wholesale price index fell in the first week of June, food and primary articles inflation was significant. Consumer price index inflation was 9 percent, he said.

The governor said the central bank looked at a number of variables of inflation including an assessment of inflationary expectations to formulate its policy.

India's wholesale price index fell 1.61 percent in the 12 months to June 6, compared with the previous week's annual rise of 0.13 percent, government data showed on Thursday. The fall was the first in at least three decades.

"There are definite trends coming through although the headline index is negative ... Oil prices are firming up and commodity prices are increasing around the world. Food production is below the trend level," Subbarao said.

Subbarao declined to comment on whether he expected the government to increase the borrowing programme at its final budget to be unveiled on July 6.

The government has stepped up the pace of its borrowing in recent weeks. It is scheduled to borrow 150 billion rupees via bonds next week compared with 120 billion indicated in the auction calendar. This will be the sixth straight week where the government will be borrowing 25 percent more than originally scheduled.