MUMBAI: Reserve Bank of India (RBI), while announcing the third quarter review of monetary policy, set out an agenda for the central government for fiscal consolidation.

The document said: "There are standard, well-known and well-founded reasons for fiscal consolidation. For both short-term economic management and medium-term fiscal sustainability reasons, it is imperative, therefore, that the government returns to a path of fiscal consolidation. The consolidation can begin with a phased roll back of the transitory components. Beyond that, in the interest of transparency and predictability, the government should ideally do two things: first, indicate a roadmap for fiscal consolidation; and second, spell out the broad contours of tax policies and expenditure compression that will define this roadmap."

The review said the counter-cyclical public finance measures taken by the government as part of the crisis management were necessary; "indeed they were critical to maintaining demand when other drivers of demand had weakened. But as the recovery gains momentum, it is important that there is co-ordination in the fiscal and monetary exits. The reversal of monetary accommodation cannot be effective unless there is also a roll back of government borrowing. Even as the government borrowing had increased abruptly during 2008-09 and 2009-10, it could be managed through a host of measures that bolstered liquidity. Those liquidity infusion options will not be available to the same extent next year. On top of that, there will be additional constraints. Inflation pressures will remain and private credit demand will be stronger with the threat of crowding out becoming quite real..."

The stance of monetary policy of the Reserve Bank for the remaining period of 2009-10 will be as follows:

* Anchor inflation expectations and keep a vigil on the trends in inflation, and be prepared to respond swiftly and effectively through policy adjustments as warranted.

* Actively manage liquidity to ensure that credit demands of productive sectors are adequately met consistent with price stability; and

* Maintain an interest rate environment consistent with price stability and financial stability, and in support of the growth process.