In an interview with The Indian Express, Subir Gokarn, who took charge as RBIs deputy governor in November 2009, said the apex bank had acted moderately in the last five months with many even criticising it for mild action. But, there has clearly been acceleration in non-food manufacturing inflation since January. Core inflation or non-food manufacturing inflation has risen sharply from 0.7% in December 2009 to 6.1% in April 2010.
What is, however, complicating issues for RBI is the global uncertainty that causes flight of capital to safety (funds shift to US government securities, seen as most safe) making it difficult for the central bank in managing the volatility in exchange rates. In the last policy statement, RBI did add a structural element, saying that a significant disruption of economic activity may evoke a response from the monetary authority. But we are not in the business of determining the (exchange rate) level, he maintained.
When asked if RBI would pause given the crisis in euro zone or till it gets a clearer picture of monsoon at home, Gokarn said, a stop-go sequence sends out very mixed signals. The ideal situation when you are maintaining a trajectory is to take it to its logical conclusion. But, this has to be done in a way that doesnt put you in a situation where you might have to reverse your action without having completed the task, or stop in the middle, he said.
With the Indian economy powering down post-September 2008, RBI adopted a very accommodative monetary stance. It slashed the cash reserve ratio by 400 basis points, reduced the repo rate by 4.25 percentage points and cut reverse repo rate by 2.75 percentage points. Besides these, it opened many other conventional as well as non-conventional windows for access to liquidity making available over Rs 5,60,000 crore additional funds.
But with recovery gaining ground, it started withdrawing from the accommodative stance in October 2009 itself by ending some liquidity support measures. In January 2010, it raised the CRR by 75 bps to 5.75% to suck Rs 36,000 crore out of the system. Taking mid-course action, it hiked repo and reverse repo rates by 25 basis points in March. Finally, announcing its annual policy statement for 2010-11, it hiked the CRR by 25 basis points to 6% and the repo and reverse repo rates too to 5.25% and 3.75%, respectively.