RBI for rollback of monetary expansion to check inflation

NEW DELHI: The RBI governor, D Subbarao, on Friday made a strong case for a rollback of the expansionary monetary policy being pursued to combat the impact of the global financial meltdown, saying it could result in another bout of inflationary pressure.

"Creation of high power money in the face of large fiscal deficit...is not costless; it can sow the seeds of the next inflationary cycle," Subbaro said, delivering the JRD Tata Memorial lecture organised by the industry body Assocham here.

RBI had made available a potential liquidity of Rs 5.60 lakh crore, nearly 9 per cent of Gross Domestic Product (GDP), to help the country tide over the liquidity crisis following the global financial meltdown triggered by the collapse of America's iconic investment banker Lehman Brothers in mid-September.

Noting that RBI would continue to pursue an accommodative monetary policy until the economic conditions improve, he said, "reversing the expansionary policies is definitely on the agenda (of the central bank).

"The current monetary and fiscal stance is, however, not the steady state. The Reserve Bank needs to roll back the special monetary accommodation", he stressed.