RBI finds itself isolated in war on inflation

Comments 0
SummaryFor months, the hawkish, inflation-fighting Reserve Bank of India has been in a shrinking minority of its emerging market peers.

For months, the hawkish, inflation-fighting Reserve Bank of India (RBI) has been in a shrinking minority of its emerging market peers. Now, the recently re-appointed central bank governor, Duvvuri Subbarao, is facing stiff opposition to his crusade at home.

As recently as last week, the RBI made clear that it will stick to its anti-inflationary stance despite censure from the government, which has signalled that 12 rate increases within 18 months are hurting growth and electoral prospects.

Inflation is near 10%, one of the highest among major economies in the world. India is among a handful of countries, such as Kenya and Nigeria, still raising rates, while the world frets over headwinds from a European debt crisis and a sputtering US economy. Neighbours in Asia have turned dovish, some such as Brazil and Turkey have already cut interest rates. Subbarao appears undeterred by the criticism. RBI sources say he is determined to keep policy tight, maybe even tighten it further. “Growth has a floor, but inflation has no ceiling,” said a senior RBI official. “If we don’t do anything, inflation expectations will rise.”

Until now, the government and the RBI have largely been on the same page when it comes to monetary policy, with near double-digit inflation not only an economic worry but also a political headache. But over the past few weeks, criticism and advice for the RBI chief have been more blunt than usual.

"I have had hesitation on a rate hike this time which in the past I did not,” said Kaushik Basu, chief economic advisor to the finance ministry, after the RBI raised the repo rate by 25 basis points on Friday.

"I would personally, yes, vote for pause,” he told reporters, when asked what the RBI should do at its October policy review.

Basu is a top adviser in the finance ministry and is known to be not only close to finance minister Pranab Mukherjee, but also a key strategist on economic policy. Basu has asked RBI ‘to think out of the box’ and consider the examples of Brazil and Turkey that cut rates to protect growth. Montek Singh Ahluwalia, deputy

Single Page Format
Ads by Google

More from Money & Funds

Reader´s Comments
| Post a Comment
Please Wait while comments are loading...