Deficient rain cause of worry, RBI to act when needed

Poor monsoon is a matter of concern and could affect food prices, but the time is not ripe for the Reserve Bank to act, its Governor D Subbarao said on Friday.

Updated: Aug 14, 2009, 21:01 PM IST

Hyderabad: Poor monsoon is a matter of concern and could affect food prices, but the time is not ripe for the Reserve Bank to act, its Governor D Subbarao said
on Friday.

"Yes, the agricultural situation is disturbing and there will be pressure on food prices. We are sensitive and mindful of the drought`s impact on inflation and will take appropriate steps," he told reporters on the sidelines of a RBI function here today.

Subbarao, however, refused to discuss in public any mid-course policy correction that the central bank may consider.
Monsoon is this year expected to bring 19 percent less rainfall than usual, resulting in an equivalent decline in sowing activities.

The Centre has already asked states to act against hoarders to check rising prices.

Meanwhile, Prime Minister`s Economic Advisory Council Chairman C Rangarajan pointed out that price rise might not be a problem at the moment, but he foresaw an escalation in prices towards the end of this year.

As per the wholesale price index the price rise was currently negative, but the RBI should think in terms of taking appropriate measures when prices rise, he added.
He said there would certainly be an impact on economic growth because of the prevailing drought. But Subbarao said the economic growth projection of 6.5 percent stands good even now.
Too early to take action on inflation

Reserve Bank Governor D Subbarao on Friday said "it is too early" to take action on inflation as signs of pressure on prices are yet to show up.

"You have to be sensitive to inflation concerns, but it is too early to be taking action for inflation," Subbarao told reporters here after a seminar. "We are sensitive and mindful of what`s happening," he added.

The RBI`s stance suggests it will wait for inflation, which has been in the negative territory for eight consecutive weeks since early June, to creep up before embarking on any reversal of its expansionary policies.

"However, we are aware that sometime down the line pressure could hit us, and certainly when signs of inflationary pressures show up, we will take action," he said
adding, that the RBI is monitoring the situation.

On monsoon and its possible impact on prices, he said: "I think there is still hope for agriculture, there is still the rabi season ... I see that even if there is rainfall now, it`s
possible to recover some of the lost ground."

On food price inflation he said, "I am unable to say to what extent the current ground situation will translate into pressure on prices and at what point of time Reserve Bank will act."

Further, Subbarao said while wholesale price index (WPI) is coming down, there are other inflation numbers (like the consumer price indices) that are stubborn.

"When you aggregate all your information into one number, you will lose some detail and within the RBI we try to retain that detail in our policy management," he said, adding primary and food articles inflation is significant.

Meanwhile, taking a cue from the Finance Ministry, which recently came out with a draft for a new direct taxes code that would ultimately replace the Income Tax Act, 1961, he said it would be a good idea to streamline the banking regulations under one code as well.

"... there are several Acts and entire banking regulation is spread across different statutes and different regulations and it might be useful to bring it all under one code," Subbarao said.

On the possibility of overhauling the banking regulations, he said "that`s something that has been told to me ... something desirable obviously."

Further, Subbarao expressed comfort to the US belief that they have leveled out and the worst is over.

"We will benefit from the global recovery, if exports pick up and if capital flows come in, as I said in a measured manner.

"If the world recovers, its certainly good for our economy," he said.

Bureau Report