Analysis: FM proposes, RBI Governor disposes

D Subbarao did not bite the interest rate cut bullet

Central bank governor D Subbarao has clearly withstood political pressure by keeping interest rates intact and reducing cash reserve ratio (CRR) by 25 basis points. The finance minister has over the last month on various occasions said that he would like a lower interest rate scenario.

The RBI governor made it amply clear that his priority is in controlling inflation over growth. The governor has said that managing inflation expectations remains his focus as underlying inflation pressures are clearly above comfort zone. In its Macroeconomic and Monetary Development review released on Monday, RBI said that inflation has stayed sticky at 7.5 per cent thanks largely to contribution from non-food products.

Near term inflation remains a matter of concern, though RBI is hopeful that it will come down by the fourth quarter. But then there is the issue of unabsorbed inflation on account of subsidised products. The FM had said that he would like to reduce fiscal deficit, one of the options available for him is to increase prices of subsidised products.

However, the window of opportunity to hike prices is closing fast as the country goes into election mode in 2014. The government has already been blamed for higher prices and inflation by the opposition and would not like to be seen doing so in the run-up for inflation. The RBI governor would naturally like inflation to come down, so that he will have a buffer for inflation to increase again on account of his interest rate cut and a price rise in subsidised products.

Till such time he is happy to play around with tweaking CRR rates and managing liquidity.