Nov. 10 (Bloomberg) -- Indian policy makers are facing a challenge in timing the withdrawal of monetary stimulus from Asia’s third-largest economy, Reserve Bank of India Deputy Governor Shyamala Gopinath said.

“The challenge for the Reserve Bank is to support the recovery process without compromising on price stability,” Gopinath said in a speech in Mumbai today. “Premature exit will derail the fragile growth but a delayed exit could endanger inflation expectations.”

India provided fiscal and monetary stimulus worth more than 12 percent of gross domestic product in the past year as the world economy experienced the worst recession since the 1930s. The central bank last month began tightening monetary policy on concern that faster inflation would worsen conditions for close to 800 million Indians who live on less than $2 a day.

“Factors like aggregate demand conditions and a well- functioning domestic banking system may pave the way for a gradual exit from the expansionary policies,” Gopinath said.

The Reserve Bank on Oct. 27 raised the so-called statutory liquidity ratio, the proportion of deposits that lenders must invest in government bonds and other approved securities, to 25 percent from 24 percent. Governor Duvvuri Subbarao said at the time that it was appropriate for the central bank to exit monetary stimulus in a “calibrated way.”

‘Corrective’ Steps

India will take “corrective” steps and pull back fiscal stimulus once economic recovery takes hold, Finance Minister Pranab Mukherjee said today.

“Fiscal consolidation is imperative,” Mukherjee told the India Economic Summit organized by the World Economic Forum in New Delhi. He said fiscal stimulus will be withdrawn in “due course,” two days after Prime Minister Manmohan Singh said it will be done next year.

India’s exit from measures designed to shield the economy from the global recession may help reduce the widest budget deficit in 16 years and ease pressure on the country’s credit rating. Moody’s Investors Service, which ranks India’s local- currency debt at two levels below investment grade, said today the nation’s sovereign rating won’t be raised unless the government cuts borrowings.

The central bank forecasts inflation to accelerate to 6.5 percent by March 31 from 1.51 percent now.

To contact the reporter on this story: Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net

Last Updated: November 10, 2009 06:12 EST