RBI has done enough to manage inflation: Gokarn

Bond traders breathe easy as rate increase fears allayed.

The Reserve Bank of India (RBI) on Friday said it had done enough to tackle inflation. This allayed the fear of aggressive rate action among bond dealers.

“We have done enough to manage inflation. We expect to see the effect in the second half of the year because policy action acts, or has an effect, with a lag. You will see it manifested over the next few months,” RBI Deputy Governor Subir Gokarn said on Friday.

Government bonds extended gains after Gokarn’s comment. The yield on 7.80 per cent government bond 2020 closed at 7.83 per cent, down from 7.91 per cent at the end of trading yesterday, according to Negotiated Dealing System (NDS) data.

“We think we have a handle on the inflationary situation,” he said on the sidelines of the Great Lakes Financial Inclusion Conference, organised by Union Bank of India and Great Lakes Management Institute.

Last week, bond prices crashed in anticipation of more rate hikes after a central bank official said more aggressive monetary policy was required to tackle inflation. Since March, RBI has raised the repo rate by 100 basis points to 5.75 per cent and the reverse repo rate by 125 basis points to 4.50 per cent.

RBI is of the view that food inflation is likely to ease on the back of good monsoon and global growth, which is looking fragile at the moment, can affect capital inflows as investors may remain risk-averse. “We have moved out of excess liquidity scenario to balanced liquidity scenario,” he said.

The central bank expects global commodity and energy markets to remain moderate to soft and supply constraints to ease towards the end of the financial year.

He, however, cautioned about demand-side pressures. “Clearly, capacity constraints are beginning to show in indicators of demand-side inflation. That is what we have been trying to address through our rate actions effectively going back to October 2009,” he said.

Headline inflation based on the wholesale price index has been above 10 per cent since February, and was a provisional 10.55 per cent in June.

The food price index rose an annual 9.53 per cent in the week to July 24 compared with the previous week’s increase of 9.67 per cent, as prices of fruit and vegetables fell three per cent, according to data released on Thursday.

Finance Minister Pranab Mukherjee told the Rajya Sabha yesterday that RBI would take necessary steps to counter inflation. “He ( RBI Governor D Subbarao) is keeping a watch on the demand side…and if it is found that the demand side needs to be taken care of, necessary adjustments will be made,” Mukherjee said in a debate on inflation in the Rajya Sabha.

Subbarao said yesterday as inflation gets generalised, more policy actions could be required.

“It is our duty to manage inflationary expectations. Now, as inflation gets more generalised and demand-side pressures build up, there is need for monetary policy action,” Subbarao told reporters in Hyderabad.