RBI says policy instruments not fully aligned - report

MUMBAI (Reuters) – The Reserve Bank of India (RBI) will continue to exit from its loose monetary policy as the current level of policy instruments is not fully aligned with the state of the economy, a deputy governor was quoted as saying in the Economic Times.

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"The direction of policy is very clear and it is really a question of pacing," Subir Gokarn told the newspaper in an interview.

He said once the policy course has begun, the bank would not like to reverse it.

The RBI has raised the repo rate, at which it lends to banks, and the reverse repo rate, at which it absorbs excess cash from the banking system twice in March and April by 25 basis points.

The repo rate now stands at 5.25 percent and reverse repo is at 3.75 percent.

Concerns of an off-cycle rate hike ahead of the scheduled policy review on July 27 have risen following a stronger-than-hope factory output growth and a sharp rise in the May wholesale price-based inflation.

Official data on Monday showed the wholesale price index rose an annual 10.16 percent in May, above a Reuters forecast of 9.56 percent and April's 9.59 percent.

Finance Minister Pranab Mukherjee on Tuesday said the central bank will take appropriate steps to control inflation and central bank Deputy Governor K.C. Chakravarty signalled the possibility of a rate hike before July 27.

Data last week showed industrial output rose 17.6 percent in April from a year earlier, the strongest since December 2009, supported by buoyant domestic consumer demand, a revival in exports and higher infrastructure spending.

"The pacing is determined both by internal and external factors. On the internal front, we are watching to see how stiff the inflationary pressure is versus the growth momentum."

The newspaper also quoted Gokarn as saying that the central bank was well aware of the current liquidity squeeze due to the advance tax outflows and payments towards the 3G auctions and wireless broadband spectrum and that they will make sure that no undue pressure develops.

Source : Reuters