Outlook on inflation will be shaped by monsoon, global energy & commodity prices

Written by fe Bureaus | Updated: Jul 28 2010, 03:57am hrs
RBI governor Duvvuri Subbarao seemed to be in good spirits as he addressed the media after announcing the monetary policy on Tuesday. In an attempt to emphasise the importance of the monsoon, Subbarrao related a small anecdote. When I was a young sub-collector, 35 years ago in Andhra Pradesh, one month of my job made me realise that monsoon had an impact on my emotional well-being and on my career prospects. Because, if it rains, everything is well on earth and cordial in heaven. You carry on with your work. But if it doesnt, all you did was drought relief. Now at the end of my career, I realise I am once again hostage to monsoon.If it rains, the monetary policy works. Everything is all right.

If it doesnt rain, there is worry. So, I want you to realise that all of us are chasing the monsoon.

How confident are you of taming inflation to 6% by March Do you want to give it an upward bias Would you say 6% is challenging

I dont think we need to give it an upward bias because this is our best judgement and at the moment we are fairly confident of our number. Rainfall, at 86% of the long period average, has been fairly well distributed except in parts of Madhya Pradesh. So, we should expect some dampening of prices on food. If more petroleum prices are deregulated, it will have an impact on inflation. It is important for us to continue watching demand-side pressures. Going forward, the outlook on inflation will be shaped by the monsoon, movements in global energy and commodity prices, which have been showing distinct signs of softening over the past few weeks and the potential build-up in demand-side pressures with the strengthening of domestic growth drivers. Commodity prices may soften if global growth is subdued and excess capacity globally may bring down import prices. I hope monetary policy actions taken since January 2010 will play a role now. We expect it to have an impact now.

When does RBI plan to come up with guidelines for new banking licenses

The discussion paper is on track. We will come up with the paper by the end of this month or during the first week of August. There have been a number of issues that have come up as to the entry level capital, promoters capital, norms for corporates and NBFCs. Some players have shown an interest.

Have you spoken to banks to increase their deposit and lending rates

Banks have indicated that the liquidity situation may remain tight for some more time as deposit growth has lagged behind the credit growth. As credit growth picks up, we expect deposit and lending rates also to move up. We expect that deposit rates will go up faster than lending rates. Bankers say credit will pick up only in the second half of the year and that demand for credit is sluggish. There is concern in moving from BPLR to the base rate.

Will you too conduct stress tests for banks here

We will be following the stress tests for banks twice a year, following the example of the US and Europe. We had conducted stress tests during the global financial crisis and we need to have more rigorous stress tests The results will be published.

Could we assume that deposits will grow at 18%

I should think so. The growth has been slower because PSUs have been withdrawing deposits, as also mutual funds and the public too, is holding more currency because of high inflation. But we expect this trend to reverse.

Will the repo rate be the operative rate

We expect the tight liquidity situation that has arisen due to 3G auction payments and telecom payments to ease by the end of this month. We expect the operative rate to be the repo rate and the system will remain in injection mode because that way monetary transmission will be better.

Will there be a change in the governments borrowing programme

We havent heard anything from the government.