Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Politics / Subbarao looks beyond inflation
BackBack

Subbarao looks beyond inflation

Subbarao looks beyond inflation

Premium

New Delhi: The country’s benchmark Wholesale Price Index (WPI) extended its longest decline in three decades as central bank governor D. Subbarao said an inflation-targeting policy isn’t enough to maintain financial and economic stability.

Wholesale prices fell 1.53% in the week to 8 August from a year earlier, the commerce ministry said in New Delhi on Thursday. That was more than the median forecast of a 1.49% decline in a Bloomberg survey of 18 economists.

Subbarao is concerned that inflation may gather speed, as evidenced by upward revisions the commerce ministry has been making to WPI in recent months.

The governor had told a forum in Hyderabad last week that the global financial crisis had shown that an exclusive focus by central banks on inflation-targeting doesn’t work.

“The central bank can’t detach itself from its stated objective of maintaining price stability and at the same time will have to address concerns over growth and orderly financial markets," said D.H. Pai Panandiker, president of the RPG Foundation, an economic policy group in New Delhi.

Subbarao slashed the Reserve Bank of India’s key interest rates six times between October 2008 and April 2009 to an unprecedented low. On 28 July, he left the reverse repurchase rate unchanged at 3.25%, kept the repurchase rate at 4.75% and said the central bank may have to reverse its expansionary measures to subdue inflation.

Gains in wholesale prices may exceed the central bank’s forecast of 5% by March next year as a weak monsoon threatens to reduce harvests and push up food prices.

Inflation has slowed from a 16-year high of 12.91% in August 2008.

Food costs, as reflected in the consumer price indices, are already high.

Consumer prices paid by farm workers jumped 11.52% in June from a year earlier after gaining 10.21% in May. Prices paid by rural workers rose 11.26% in June and those paid by industrial workers climbed 9.26%.

Subbarao said the discrepancies between these inflation measures complicates monetary policy.

The governor claims borrowing by Prime Minister Manmohan Singh’s government to fund the widest budget deficit in 16 years also impedes the transmission of central bank policy.

Finance minister Pranab Mukherjee on 6 July unveiled plans to borrow a record Rs4.51 trillion to fund a budget gap estimated at 6.8% of gross domestic product.

Subbarao last week said inflation-targeting can’t do much to provide protection against asset-price bubbles and doesn’t necessarily deliver financial or macroeconomic stability.

“The challenge thrown up by the crisis is what should be the mandate of the central bank," he said. “If an exclusive focus on targeting of inflation has failed, how do we rejig that mandate?"

feedback@livemint.com

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Politics News and Updates on Live Mint. Download The Mint News App to get Daily Market Updates & Live Business News.
More Less
Published: 21 Aug 2009, 12:54 AM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App