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Amidst concern on a deficient monsoon and its impact on food prices, Reserve Bank of India (RBI) Governor Raghuram Rajan on Wednesday said the central bank needed to keep inflation under check for sustainable economic growth.
On Tuesday, RBI lowered projections of the economic growth as measured by GVA (gross value added) to 7.6 per cent from the 7.8 per cent estimated in April due to global factors and likely impact of below normal monsoon.
According to the latest estimates, India is expected to get deficient monsoon. It is likely to be 88 per cent of long-term average.
Besides, inflation still remains a worry for the RBI as it expects price rise to remain subdued till August before rising to six per cent by January 2016.
The other concern for the RBI is rising crude oil prices.
Since the last policy in April, the crude oil prices have witnessed an increase of nine per cent.
Dismissing the argument that RBI had been behind the curve, Rajan said, “We have always used room (for cutting key policy rate). We never had excess room.”
As part of its second bi-monthly monetary policy review, RBI cut the repo rate (short-term lending rate) from 7.5 per cent to 7.25, but left other policy tools like cash reserve ratio unchanged at four per cent and statutory liquidity ratio at 21.5 per cent.
Replying to a query on why RBI is so dogmatic about inflation control, Rajan said central banks across the world focused on inflation and RBI is no exception.
“We need to balance two things, inflation and growth...the primary lesson from economics is to bring inflation down, ensure that people feel comfortable at low level of inflation and then you can bring normal interest rate down as much as possible,” he said to private news channel ET Now.
“Today we are in a situation where compared to the rest of the world, the rest of the world is in deflation but we have very high inflation. As a result, we cannot bring normal interest rate down,” he said.
