RBI says no specific GDP, inflation nos to guide rate stance
Mumbai: Stating that interest rates have peaked, the Reserve Bank on Wednesday said it does not have a specific level on inflation and growth at which it will change its monetary policy stance to be accommodative.
"We don't want to lock ourselves into specific number or corridor (on inflation or GDP growth rate)," Governor D Subbarao told analysts on a post-policy conference call.
RBI will watch both the inflation and the growth numbers in formulating its monetary policy, he said. When asked if the stance will change if the growth slips sharply into 5-5.5 percent levels, the Governor said it will be taken into account.
The RBI's comfort level of inflation is at 5 percent, he added. Inflation for June stood at 7.25 percent.
In its first quarter policy review yesterday, the Reserve Bank had chosen to retain all key rates, citing rising risks to its focus area of inflation from a variety of fronts including poor monsoons, and no steps from the government to prod growth, like cutting down expenditure or reducing the subsidy bill.
During the call today, deputy governor in-charge of monetary policy Subir Gokarn said the rate cycle has peaked and RBI retained status quo on rates as it saw some new inflationary pressures or potential inflationary pressures.
"Even though the growth expectation has come down, inflation projection or expectation has gone up. So when we put the two together, the argument for a status quo policy was made," he said.
When asked if the RBI move to go in for a greater than expected 0.50 percent rate cut during the April policy review was hasty, Governor said it was not, and pointed out that, "it was necessary to front-load the rate reduction that was based on the expectation that some action will follow from the government side and in the event it did not happen."
Subbarao today spelt out the Mint Road's expectations from the government, which include taking steps to enhance supply of food items which can reduce inflation, steps on fiscal consolidation by freeing administered oil prices and taking steps to improve investment inflows.
On a question on the likely fallout on inflation if the administered fuel prices are lifted, Subbarao said there will be an impact on inflation in the short to medium term.
But even if the status quo continues the impact on fiscal deficit has an inflationary impact.
He went on to add that it is better to raise the prices as such a move improves efficiency, and pointed out that the fiscal burden of subsidies is getting "unsustainable".
Gokarn said there is no plan at present to raise money from a sovereign bond sale.