The Reserve Bank of India (RBI) is not in favour of raising interest rates, despite rising food-price inflation that has been exacerbated by the current drought spell. Speaking at an RBI seminar here on Friday, governor D Subbarao said he was concerned about the growing pressure from farm prices, but that it was too early to take action. ?We are monitoring the situation and will take appropriate action. But it is still too early to be concerned about inflationary pressures,? he said.
RBI?s statement will help industry ward off expected rising interest costs on their investment plans at a time when the economy is seeing the first signs of recovery. In its first-quarter review of monetary policy in July, RBI had halted its succession of rate cuts that began last October, giving rise to anticipation that it could raise the benchmark reverse repo rate from the current 3.25%. Reverse repo is the interest that banks earn on cash they could lend out, but park with RBI instead.
Analysts interpreted Subbarao?s statement as an indication that restoring growth would continue to dominate RBI?s policy response for the time being. At the same time, Subbarao said making monetary policy independent of fiscal policy is an important reform measure for the country.
Coordination between monetary and fiscal policies has become a challenge, he said, adding that the government?s huge borrowing programme ?militated? against the monetary policy objective of a lower interest-rate regime. ?The first challenge going forward is to manage the coordination between monetary and fiscal policy… this very rapid expansion in the borrowing programme has impeded monetary transmission,? Subbarao said.
Prime Minister?s Economic Advisory Council chairman and former RBI governor C Rangarajan said his estimate of GDP growth for the 2009-10 is between 6% and 6.5%. ?Exports are not doing well, industrial production is showing signs of picking up, but the drought will have an impact on growth,? he told reporters at the seminar. RBI too in its policy has projected a growth rate of 6% with an upward bias.
Elaborating on real sector trends, Subbarao acknowledged they were a cause for concern. ?The agriculture situation is disturbing, there would be pressure on food prices.? Retail prices of most food items have risen by 32% in the past few months, sugar and pulses seeing the sharpest increases. In its policy review, RBI has revised its inflation forecast to 5% by the end of March 2010 from the earlier 4%.
The rise in food prices has been aggravated by drought in several states. Since the start of the four-month monsoon season on June 1, rains are 29% below normal, according to met department data. Dearer food has neutralised the impact of a fall into the negative zone of the wholesale price index, which reached a 33-year low of – 1.74% for the week ended August 1–its ninth straight drop.
?You have to be sensitive to inflation. (But) I am unable to say how the drought situation will translate into crisis and what action will have to be taken at what point of time,? Subbarao said.