RBI governor Duvvuri Subbarao on Tuesday dismissed the view that the central bank was trying to send a message of intolerance towards higher fiscal deficit and government borrowings through the cut in SLR. ?The move was not driven by the need to shift the banks? portfolio from the government to the private sector,? Subbarao said.
Speaking to reporters at a conference after the release of the first-quarter review of monetary policy, the RBI governor said there was indeed scope to cut policy rates, but said it was difficult to give a timeframe.
?Well, I see a scope, but I cannot really say when; I cannot even say when it will happen,? said Subbarao. He pointed out that the growth-inflation dynamics were becoming complex and, therefore, it was not possible to say what exactly would trigger a rate cut. The governor said the RBI’s action on rates will depend on not just the inflation projection, but also on the growth outlook and other factors. ?It would also not hinge only on a fiscal correction,? he said. ?We cannot characterise that (fiscal correction) as necessary or sufficient. How we evaluate that as necessary or sufficient or both will depend on other circumstances.?
Subbarao said the economy is not in stagflation even though the central bank’s growth projection is lower than its inflation outlook. He said the momentum of core inflation was disturbing and suggested that demand pressures were still present.
The governor said the fall in core inflation was not commensurate with the fall in growth rate. He highlighted worries over inflation, especially with the monsoon playing truant. However, he said that the situation would not be as bad as 2009-10 when food inflation soared to double digits after a nationwide drought scenario. Subbarao said the the country had enough buffer stock and better management of drought situation, which could prevent a runaway rise in food prices.
In 2009-10, food inflation surged to as high as 20% with failed monsoon being a major factor. In May 2012, food inflation was 10.81% Also, the weak monsoon may not have a big detrimental impact on growth, given the lower share of agriculture. On growth, the governor said that the RBI has deliberately not put a downside or upside bias to the 6.5% projection unlike in the past.
Subbarao said fiscal corrections would definitely give a boost to investment.
While the RBI hopes that banks will pass on the benefits of the more freely available liquidity through the SLR cut, Subbarao said that banks must understand the reason for slower deposit growth by interacting more with depositor groups.