ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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There Are Many Doors to Exit

The Reserve Bank of India signals that the phase of easy and extensive accommodation is over.

The Reserve Bank of India’s (RBI) second quarter review of the monetary policy has come out with a clear strategy for an exit from the very large accommodation that was put in place after the eruption of the global financial crisis in September 2008. But for the fact that revisions of policy rates and the cash reserve ratio (CRR) have been withheld, the quarterly review statement has all the ingredients of signalling a swift move towards tightening in the coming months.

The first signal is the change in the stance of policy. Compared to the first quarter, the second quarter stance is very hawkish inasmuch as the word “inflation” or inflation expectations occurs twice and has first order of priority, and price and financial stability have been emphasised twice even while comfort has been given to meeting the demand for credit. Second, the unusual and top priority assigned earlier to meeting the “credit demand of the government” has been summarily withdrawn. This implicitly closes the open market operations (OMO) purchase window for gilts. These are strong enough signals to show that the policy has shifted its bias towards containing inflation expectations and maintaining price and financial stability.

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