If you are looking for a signal for interest rates to ease, you have to wait.
Reserve Bank’s all-new governor Duvvuri Subbarao underlined a hawkish continuity at the central bank on Tuesday as he said it was too early to read too much into a moderation in headline inflation.
And taking on critics who say that the war on inflation could hurt growth by cutting back credit, Subbarao – in his first news conference after taking over from fellow hawk Yaga Venugopala Reddy – he said combating price rise was needed to ensure sustained long-term growth.
“For sustained economic growth, it is essential that inflation and inflation expectations be contained,” said the career bureaucrat who is also a trained economist.
Subbarao said it was too early to conclude that that an arrest in wholesale price-based inflation was a “discernible trend.”
“We have to watch commodity prices globally, besides domestic demand pressures (before taking a call on raising rates further). Though supply side measures (increasing supplies) may help, demand control measures are also necessary to moderate inflation,” he said.
The inflation, which edged up close to a 16-year-high of 13 per cent, moderated to 12.3 per cent in data released last week.
Subbarao said curtailing demand pressures was needed because there were no significant options in influencing prices from the supply side.
If growth tapered as a consequence of central bank measures, it was only logical, the governor said.
“The intent behind the monetary tightening (raising rates) was, in fact, to moderate demand, and hence, some slowdown should not surprise us,” he said.
After three years of over 9 per cent growth, the economic growth moderated to 7.9 per cent during the April-June quarter of 2008-09.
While stressing the importance of financial sector reforms, Subbarao said that they would have meaning and relevance only if they were anchored in real sector objectives. “Real sector (economic and social sectors) reforms involve building physical and social sector infrastructure. Thus, real sector objectives are ahead of financial sector reforms. Thus, monetary policy plays a subordinate role to fiscal policy,” Subbarao pointed out.
On financial sector reforms, the governor said that the RBI along with the Centre would bring out a comprehensive report of the Committee of Financial Sector Assessment soon. Three previous committees, headed by RH Patil, Percy Mistry and Raghuram Rajan studied various aspects of financial sector reforms. The reports of their findings are still to be released.
“Obviously this (reforms) is the shared responsibility of the government, the RBI and indeed, all other regulators,” Subbarao added.