Former Reserve Bank Deputy Governor, S S Tarapore, said on Tuesday that the RBI should tighten its policy to contain high inflation which otherwise would bring serious risks to the Indian economy in the next 12-24 months.
"The current inflation rate of 12 per cent is clearly unacceptable to the Indian polity...such a high rate of inflation has serious economic, political and social repurcussions...policy should aim to squelch the current inflation and inflationary expectations," Tarapore said.
In the absence of a strong monetary policy, the economy would face serious risks in the next 12-24-months, he added.
Given the current crisis in the financial markets, the Reserve Bank should not lower its signalling interest rate and should return to its inflation-targeted policy path, the former RBI Deputy Governor said.
"There should be no question of any lowering of the RBI signalling interest rate," he said.
The domestic economy should also gear up against possible large capital outflows and the apex bank should be willing to sell in the forex market to obviate the stampede at the exit door.
"The RBI would need to raise interest rates and tighten liquidity well before the exodus of capital.
Further more, some injection of liquidity is necessary to avoid a total dislocation of the credit delivery system," he said.
"When outflows start, the RBI should let a gradual depreciation (in the Rupee) to take place," Tarapore said.
Further, the RBI should stick to its policy fundamentals during the present global financial meltdown and not diverge from its policy of inflation-control.
As regards the non-performing assets in the banking system, Tarapore said that the authorities needed to devise strategies to handle this difficult problem (of rising bad loans).
Tarapore also said the Reserve Bank should take steps to control credit growth in the system.
"If this pace of credit expansion is allowd to continue, the RBI would have to inject massive liquidity or there would be a sudden cessation of credit," he said.