RBI guv sees inflation risks, limited room to ease policy

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SummaryReserve Bank of India governor Duvvuri Subbarao struck a hawkish note on Saturday when he said there are upside risks to inflation from food and commodity prices, while room for monetary easing is limited.

Reserve Bank of India (RBI) governor Duvvuri Subbarao struck a hawkish note on Saturday when he said there are upside risks to inflation from food and commodity prices, while room for monetary easing is limited. Headline inflation slowed to its lowest level in more than three years in January, but some analysts say the RBI will watch the fiscal and current account gap and inflation risks before easing again.

“There are upside risks for inflation. In particular, food prices are going up as a result of cyclical factors... Then there is pressure on inflation from global commodity prices,” Subbarao told reporters in Moscow.

The RBI cut its key policy rate for the first time in nine months in January, but struck a cautious note on further easing as it waits to see how the government’s Budget aims to bring a bloated fiscal deficit under control.

“At this moment there is room for monetary easing, but that room is limited and we have to make a careful judgment on how to use that limited room,” Subbarao said on the fringes of a meeting of Group of 20 finance ministers and central bankers.

India’s high fiscal and current account deficits, in addition to inflation risks, are deterrents for further monetary easing, which is seen necessary to support sagging GDP growth.

The current account deficit widened to a record high of 5.4% of GDP in the September quarter, and Subbarao recently said it is likely to be at an all-time high in the fiscal year that ends in March. In October, strained finances forced the Indian government to revise its fiscal deficit target for the fiscal year ending in March to 5.3% from 5.1%.

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