Reserve Bank of India (RBI) Governor Subbarao today said the status quo maintained by the central bank in the policy rates in the last review was a “comma” and not a “full stop”. His remarks came ahead of the monetary policy review for the third quarter on January 25 when RBI is expected to increase rates to control inflationary pressures.
Addressing the Second Business Standard Lecture here, Subbarao said in calibrating the exit from the expansionary monetary stance of the crisis period, the central bank was struggling with the growth-inflation dynamics over the last one year.
“The dilemma then boiled down to communicating to the market that our action should be interpreted only as a comma and not a full stop. Whether or not we managed the dilemma effectively is, of course, for you to judge,” he said.
By the time of the second-quarter review in early November 2010, it had already raised policy interest rates five times.
The RBI governor said the central issue before this policy review was whether it should continue on the tightening spree or pause before resuming tightening later on.
It consulted experts and economists and found that opinion was divided among them. One view was that it must pause for a bit in order for the rate hikes already affected to play out, and then resume tightening. The opposing view was that it should continue tightening to a point that would deliver RBI’s inflation projection and pause only after that.
“Inside the Reserve Bank, the view was that within the policy trajectory, it did not matter if we paused briefly as long as we remained committed to the eventual outcome,” he said.
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In the coming review also the RBI will be faced with the challenge of taming inflation. Food inflation rose to the yearly high of 18.32 per cent for the week ended December 25. The overall inflation was 7.48 per cent in November.
RBI has raised rates six times in 2010 and is expected to increase the repo rate by another 25 basis points in the next review.
Complete coordination between govt, RBI not possible: Subbarao
Former Reserve Bank of India (RBI) governor Bimal Jalan today said multiple agencies should not talk about the likely monetary policy action by the central bank. His view was, however, contradicted by present Governor D Subbarao who felt different views could not be avoided in a democracy.
Jalan, who was chairing the Second Business Standard Lecture, said it would be good if there were no preliminary estimates from the government side or from others before RBI gave out its assessment. He also said convergent views within the central bank should not be discussed in the public.
Subbarao, on the other hand, said in a democracy it was not possible to completely coordinate the views of all. Quoting a former finance secretary, he said there could be divergent views within the government, letting people to hear them all.
The debate is in the wake of projections made by bankers, economists, government officials, industry and experts about the future policy action by RBI before every credit policy review. Different functionaries, within and outside the government, often comment on how RBI could act given the inflation and the growth scenario. At times, bankers and central bank deputy governors also give their comments on the state of the economy and the impact it can have on the monetary policy.