An edgy bond market on Thursday drew some comfort from Reserve Bank of India (RBI) Governor D Subbarao’s sensitivity towards the slowdown in domestic economic expansion, though he was quick to reiterate the central bank was willing to sacrifice some growth to rein in high inflation. “Growth has decelerated as we have seen 7.7 per cent for the first quarter this year,” Subbarao told reporters at a press meet here.
“There is a concern that the tightening RBI has done has affected investment and production in the country. We are sensitive to the deceleration in growth,” the governor said adding , “but at the same time, we are equally sensitive to the persistence of inflation...Inflation has been high. So we have to weigh growth and inflation dynamics...It is true that we have raised rates 12 times but inflation rules high, though it has come off from its peak.”
The benchmark 10-year gilt, 7.80 per cent, 2021, rose around 7 paise to Rs 94.12 after his comments.
India’s headline inflation rate has remained well above nine per cent for nine straight months now despite the central bank hiking policy rates a dozen times by a total 350 basis points (bps) since March 2010.
The central bank will next review its monetary policy on October 25, and the market believes it will raise the key policy rate, Repo rate, by another 25 bps if the Wholesale Price Index inflation rate for September shows no signs of easing.
The government will announce September data for headline inflation Friday. “What action we take, whether we raise further or loosen, you will know on October 25,” was all Subbarao said to a query on policy prospects.
The governor said RBI will remain committed to taming inflation even if some growth was to be sacrificed. “...When inflation is as high as 9.8 per cent, it is difficult to bring it down without compromising on growth. So we are trying to trade-off at this time on bringing down inflation, even if that means bringing down growth by a few basis points,” Subbarao said. When pointed out that inflation had remained high despite the series of rate hikes, he said, “You don’t know the counterfactual. What really would have happened had the RBI not tightened, how much higher inflation would have been...” Subbarao expressed concern on the evidence of demand-side pressures in the economy, mostly from the non-food side manufacturing inflation.
“Monetary policy has a role in this because supply shocks are structural in nature, both from the oil side and the food side, and also because there is evidence of demand-side pressures in the economy, most importantly from the non-food manufacturing price inflation,” he said.
Subbarao also said high oil prices, along with rupee fall, had put pressure on inflation. “Rupee depreciation certainly had an adverse impact on the cost of our imports, particularly on the cost of oil...that comes particularly at a difficult time when inflation is also high,” Subbarao said.
Subbarao said depreciation in the rupee had more than offset the sobering effect of a moderation in crude oil prices. He said between July and October, the net impact of rupee and oil price’s fall was a three per cent rise in crude oil prices in rupee terms.
When asked why RBI was continuing with its rate hikes when other central banks were reversing their stance, Subbarao said, circumstances in which other central banks were easing monetary policy were different from India’s.“...Their circumstances (in Asia) are quite different from ours. For example, Turkey... So as much as we look at what other central banks are doing, we take into account our own domestic circumstances and the domestic context in formulating our policy,” Subbarao said.
