BackInflation is ‘still high’, says Subbarao
RBI governor defends decision to cut interest rates amid worsening current account deficit
Premium(Abhijit Bhatlekar/Mint)
Mumbai: Reserve Bank of India (RBI) governor D. Subbarao on Monday reiterated that the country’s inflation is still above the regulator’s comfort zone, though he defended the central bank’s decision to cut interest rates amid the worsening current account deficit.
“Inflation is still high at 7% plus, and we have been dismayed by the CSO’s (Central Statistics Office) projection of 5% growth last week. The question is how do we balance between declining growth and stubborn inflation?" Subbarao said while addressing graduates of the Indira Gandhi Institute of Development Research in Mumbai.
In its April 2012 annual policy review, RBI had pledged to contain wholesale inflation at 4-4.5%. However, at 7.18% in December, it’s still above its comfort zone, though down from 8.07% in September.
The dip in inflation allowed RBI to cut the repo rate for the first time in nine months in January by 25 basis points (bps) to 7.75% and infuse ₹ 18,000 crore in the banking system by cutting the cash reserve ratio to 4%. A basis point is one-hundredth of a percentage point.
However, Subbarao said inflation was still on his radar.
“People who want growth are more articulate, they have a platform and they are heard. Not that I do not have sympathy for them, but people who are hit by high inflation do not have such opportunities to be heard," Subbarao said.
Many economists have questioned the rate cut as the current account deficit is at record levels, having widened to 5.4% of gross domestic product (GDP) in the second quarter of the current fiscal year from 4.2% in the year-ago period, signalling the country’s increasing vulnerability to external shocks.
The rise in the current account deficit to $22.3 billion from $16.4 billion was mainly on account of a widening trade deficit and a slowdown in inward remittances from overseas Indians, RBI data shows.
“Some analysts ask us how come we reduced interest rates if the current account deficit was likely to be higher? We try to reason that lower interest rates may not necessarily aggravate the aggregate demand," Subbarao said. “But these decisions are made on judgement," hinting that the decision was not based just on economic analysis.
The governor is just trying to tone down expectations of deeper rate cuts after the CSO estimates last week, said Shubhada Rao, chief economist at Yes Bank Ltd.
“Normally, in the current conditions, one should expect rates to fall by 100-125 bps, but we are expecting more of a 50-75 bps because of inflation," Rao said, adding that it’s unclear whether rates will be cut when RBI releases its mid-quarter review in March. “We do not expect inflation to come down to RBI’s comfort zone even in the next fiscal 2013-14," she said.
Subbarao also said Indian exporters have not been able to take advantage of a 20% fall in the rupee in the last two years as global demand has slackened.
“But imports are inelastic with $140 billion because of oil, which is subsidized by the government," Subbarao said while warning that the deficit will widen further.
The trade deficit in the September quarter expanded to $48.3 billion from $44.5 billion in the year earlier as exports declined faster than imports. Merchandise exports contracted 12.2% to $69.8 billion from $79.6 billion. Merchandise imports fell 4.8% to $118.2 billion from $124.1 billion.
Key data releases are slated for this week, starting with December industrial production on Tuesday, followed by wholesale inflation numbers on Thursday.
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