People suffering due to high inflation forces RBI governor D Subbarao to hold rates
MUMBAI: It is the silent millions of poor squeezed by soaring prices who were the driving force behind the Reserve Bank of India's decision to keep interest rateshigh, the central bank's governor said on Monday.
"People who are worried about economic growth are typically quite articulate, that they have a platform to express their concerns," said Governor Duvvuri Subbarao, using language strikingly different from the cut and dry style usually preferred by central bank chiefs.
"I have sympathy with that view (that high interest rates was hurting growth). I am not saying that's an invalid criticism. But I just want to say that their voice is heard, but people who are hurt by inflation - the large majority of the poor - their voice is not heard."
Corporates and even Finance Minister P Chidambaram, who in the past has said inflation is a tax on the poor, have expressed unhappiness at RBI's reluctance to lower interest rates. After a nine-month gap, Subbarao lowered key interest rates late last month by 25 basis points.
A basis point is 0.01 percentage point. Economists affiliated to prominent banks and brokerages have forecast interest rate cuts of 50-75 basis points by December 2013.
While the statistics office stands by its forecast citing poor investments, Chidambaram is forecasting 5.5 per cent growth believing there are green shoots in the economy.
Subbarao expressed concern over the rising current account deficit, the excess of spending overseas over exports of goods and services.
"We would not worry so much if it was on account of import of capital goods, but here we are having current account deficit on account of oil and gold," he said. "The way we are financing it. We are increasingly financing it through volatile flows. We should ideally be financing through foreign direct investment."
Current account deficit for the September quarter rose to a record 5.4 per cent of the gross domestic product and is forecast to be above 6 per cent for the December quarter.
In an interview to this newspaper in October last year, Chidambaram had said the finance ministry was, if necessary, prepared to "walk alone" if the RBI did not respond to reform measures by cutting interest rates.
The central bank has backed reform measures announced by the government since September last month, but have stuck to their guns when it comes to rates, as inflation has not declined noticeably.
RBI Governor warns of widening CAD
The Reserve Bank of India Governor D. Subbarao, on Monday, warned the country against widening Current Account Deficit (CAD), which is expected to be higher than last year.
“Today, the external sector is vulnerable. Last year, the CAD was 4.2 per cent of gross domestic product (GDP). This year, in 2012-13, we expect the CAD to be significantly higher than that, historically, the highest CAD measured as a proportion of the GDP,” said Dr. Subbarao while speaking at the convocation of Indira Gandhi Institute of Development Research (IGIDR), here.
At present, the CAD is at 5.3 per cent of GDP in the second quarter of the current financial year.
In his review of third quarter policy in January-end, Dr. Subbarao had highlighted the issue of widening CAD, which would disturb policy actions.
Rupee has depreciated by about 20 per cent in the last two years. “We expect the rupee depreciation to be a natural counter-force to increasing CAD, but we have the rupee depreciating and still CAD is high.”
“We would not worry so much if the CAD is high … if it was due to import of capital goods … but because of import of oil and gold.”
The other concern is that the way India is financing the CAD which is increasingly through volatile flows instead of getting much of foreign direct investment (FDI).
On reducing the rate in the last policy review, Dr. Subbarao said that “the dilemma we faced in making our monetary policy in the context of the CAD was that we reduced rates at a time when CAD was so high because one would expect that if the CAD is going to go up, the central bank would keep a tight policy. On the other hand RBI reduced rates.”
The RBI Governor said that the country was dismayed by the growth number put out by the CSO (5 per cent advanced estimate) as it was the lowest in the last decade. Growth was slow because consumption had fallen, net exports had fallen, and, most importantly, investments had declined.
“This is a matter of concern because today’s investment is tomorrow’s production capacity. So, if investments are not taking place today, then our growth potential on the way forward is going to be hurt.”
At 7.2 % inflation is still high: RBI governor
MUMBAI: Ahead of the January inflation readings later this week, Reserve Bank governor D Subbarao on Monday said the price rise index which slowed to a three-year low of 7.18 per cent in December, is "still high."
"If you take the macroeconomic context today, you find that growth has moderated, inflation has come off the peak, but even at 7 plus per cent, it is still high," he said while addressing the convocation of the RBI-promoted Indira Gandhi Institute of Development Research here.
The forthcoming inflation numbers are important as they come after the January 29 policy easing, when the RBI cut both the interest rates as well as the cash reserve requirements of banks by 25 bps.
The also come after the government partially freed diesel prices in the middle of January by allowing oil companies to raise retail diesel by 40-50 paise every month apart from taking away the subsidy on bulk diesel customers.
While retail or consumer-price based inflation readings jumped to over 10 per cent in December, headline inflation declined to a three-year low to 7.18 per cent during the month.
The January inflation numbers are also crucial because they will be considered before the mid-quarter review by RBI on March 19.
Taking a dig at those who blame his tight monetary stance as a major reason for the steep decline in growth, the Governor said: "The RBI has been criticised for hurting growth and we are sensitive to that. But one should understand that the person blaming for growth is very articulate and has got proper platforms for speaking up."
"However, the person pinched by inflation does not have a platform and I think both the RBI and the government should take care of that part of the population," said Subbarao, who fought a solitary battle of nearly 40 months to fight inflation even as his counterparts across the globe have re-embraced an easy monetary policy regime as growth in their home countries faltered again.