Basel, Switzerland: Inflation in India is becoming a concern sooner than anticipated and the current monetary stance must be unwound, although the central bank must consider the impact on growth, its governor said on Monday.
Reserve Bank of India (RBI) governor D. Subbarao also said that special drawing rights— the International Monetary Fund’s internal unit of account—do not fully meet the criteria for being a reserve currency and he did not expect it to replace the dollar.
India, in the middle of the worst dry spell in nearly four decades, has seen food prices rising by an annual 14.5% in the week to 22 August. A government panel has said wholesale price inflation could rise beyond a 4-5% comfort zone by the end of the fiscal year to 31 March.
In July, RBI held policy rates steady after slashing the key lending rate by 425 basis points between October and April. One basis point is a hundredth of a percentage point.
“We believe that inflation is becoming a concern sooner than we’d expected earlier and we have to balance the need for growth and price stability,” Subbarao said in an interview. “Inflation is a more urgent concern than in the other parts of the world. We know that there is risk to premature withdrawal or exit from the expansionary policy and there is a risk to delaying it too much... Our current monetary and fiscal stance is not the steady state. We have to unwind.”
The Planning Commission, which advises the government on key policy issues, forecast Asia’s third largest economy to expand by 6.3% for 2009-10.
The economy grew 6.7% in 2008-09, slower than the 9% or more growth clocked in the previous three years, and the central bank has forecast 6% growth in 2009-10 with an upward bias.
Subbarao also said India’s twin fiscal and current account deficits were unsustainable and must be corrected.
“I’m saying that we must work hard on that. We are one of the few emerging countries with both fiscal and current account deficits and that is not sustainable. That’s something we should be concerned about,” he said.
Subbarao was in the Swiss city of Basel for a bi-monthly meeting of central bank governors at the Bank for International Settlements, having just met his Group of Twenty counterparts in London on Friday and Saturday. Asked about the role of the dollar and proposals by China and Russia to use special drawing rights (SDRs) as a reserve currency, he said: “As much as the dollar is the world’s reserve currency now, it cannot be replaced by a fiat.”
“If some other currency becomes stronger because of their economic muscles or because their economy inspires, that (replacement) might happen in an organic and systematic way. You cannot be that in a conference that everybody decides that we are going to replace the dollar,” he added.
SDRs have gained prominence after China proposed that they could be used as an alternative to the dollar as the world’s reserve currency.
Subbarao said a currency has four functions—the unit of account, the store of value, the medium of exchange and the standard for measuring purchasing power. “SDR meets only one of these four criteria, that it is the unit of account... I don’t see that replacing the dollar as a reserve currency because a reserve currency has to have attributes which SDR does not have.”